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Transition back to long-run equilibrium

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Imagine that Americans become more nervous about the economic outlook and increase their saving. If Americans now save about 3 percent of their disposable incomes, they instead save 23 percent of their disposable income - in other words, this is a sizeable increase in saving. In general, you should use the IS-LM and AS-AD logic to answer these questions.

Assume that there is no policy response to the increased saving by American families and consider the transition from the short-run to the medium-run (the medium-run is some intermediary or a transition state between the short-run and the long-run) and back to the long run. Is is true or false that the US will see increased inflation during the transition back to long-run equilibrium? Can you please explain why if true or false?

Reference no: EM132405865

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