Consider a positive shock to demand for goods and services. The demand shock (&) is assumed to persist for one period. In particular, suppose that &=1 for one period and then return to its normal value of zero. Using a graph of the dynamic AD-AS model, show the effect of this change on the economy. What happens to the inflation rate and output immediately upon the shock and in the long run?
Consider a positive shock to demand for goods and services. The demand shock (&) is assumed to persist for one period. In particular, suppose that &=1 for one period and then return to its normal value of zero. Using a graph of the dynamic AD-AS model, show the effect of this change on the economy. What happens to the inflation rate and output immediately upon the shock and in the long run?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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