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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
ISBN: 9781305585126

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BuyFindarrow_forward

Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
ISBN: 9781305585126
Textbook Problem

Stagflation is caused by

a. a leftward shift in the aggregate-demand curve.

b. a rightward shift in the aggregate-demand curve.

c. a leftward shift in the aggregate-supply curve.

d. a rightward shift in the aggregate-supply curve.

To determine
The cause of stagflation.

Explanation

The demand comes from all the economic agents such as the households, firms as well as the government. The demand depends on the price level of the economy. The increase and decrease in the price level determines the level of demand in the economy. The aggregation of all the individual demands in the economy is known as the aggregate demand thus, the aggregate demand explains the relationship between the general price level and the level of real GDP demanded in the economy by the economic agents such as the households, firms and the government. The supply depends 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 economy faces inflation when the general price level of the economy rises above a specific point. When the economy experiences the inflation along with the stagnation of the economy, then it is said to be the stagflation.

Option (c):

When there is a leftward shift in the aggregate supply of the economy, it reduces the equilibrium output of the economy and also increases the price level in the economy above the equilibrium level...

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