Answered: Suppose an economy attains its long-run…

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 1PA

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1a. Suppose an economy attains its long-run equilibrium at last year. However, after the start of the new year, it has been experiencing high inflation. One group of economists argues that it is caused by excessive aggregate demand, while another group argues that it is caused by the inadequate aggregate supply. How do you know which group is correct? Can you use the aggregate demand and aggregate supply model to explain how you conclude whether the first group or second group of economists is correct? *Use graphs to show your answer if necessary*

b. If the first group of economists is correct, describe how the system will return to equilibrium in the long run. Compare the old and new equilibrium and highlight the differences between them.

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