Textbook Problem

The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy.

a. How would this news affect the price level that people would expect to prevail?

b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?

c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?

d. How does this change in profitability affect the short-run aggregate-supply curve?

e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of output produced?

f. Do you think this Fed chairman was a good appointment?