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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?

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Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912

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Chapter
Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912
Chapter 20, Problem 7PA
Textbook Problem
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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?

Sub part (a):

To determine
Impact of different views on inflation on the economy's equilibrium.

Explanation of Solution

The supply is dependent upon the price level in the economy. When the price level is higher, the suppliers will be receiving higher income, and this would incentivize them to increase the supply in the economy and vice versa. The aggregation of the supply curves of all the firms in the economy is known as the aggregate supply curve. In the short run period, the aggregate supply curve represents the relationship between the price level in the economy and the supply by the firms.

The demand comes from all the economic agents such as the households, firms, and the government. The demand depends on the price level of the economy. The increase and decrease in the price level determine the level of demand in the economy...

Sub part (b):

To determine
Impact of different views on inflation on the economy's equilibrium.

Sub part (c):

To determine
Impact of different views on inflation on the economy's equilibrium.

Sub part (d):

To determine
Impact of different views on inflation on the economy's equilibrium.

Sub part (e):

To determine
Impact of different views on inflation on the economy's equilibrium.

Sub part (f):

To determine
Impact of different views on inflation on the economy's equilibrium.

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