**Question:**1. Show that if the economy’s aggregate supply curve is vertical, fluctuations in the growth of aggregate demand produce only fluctuations in inflation with no effect on output.**Explanation:**In this scenario, the aggregate supply curve being vertical implies that the economy is at full capacity and supply is inelastic. Changes in aggregate demand shift the demand curve, affecting the price level but not the quantity of output. This results in inflationary or deflationary pressures without changing the actual output of the economy.The vertical aggregate supply curve reflects a classical view where output remains constant despite demand changes, emphasizing price adjustments rather than output fluctuations.

This can be defined as a concept that shows the total demand for the products and services in a nation of a particular commodity in a particular period of time with the given prices in the market. It also works as an indicator which shows the standard of living of the people in the nationAccording to the given situation, the vertical AS curve shows that the economy is working at its maximum level of output and any rise in AD due to any reason will only result in a rise in P, not the level of production. This is because, in the long run, the capacity of production of an economy is fixed, and any attempt to push output beyond this fixed limit of output will result in inflation.In this case, fluctuations in AD affect only the P level, not the Q of goods and services produced. If AD rises, prices rise; if AD falls, P fall. However, the level of output remains constant, as the economy is already producing at its maximum capacity of output.A vertical AS curve signifies that the economy has reached its long-run equilibrium output. Fluctuations in AD will only manifest as inflationary or deflationary pressures without affecting the overall output level.

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Show that if the economy's aggregate supply curve is vertical, fluctuations in the growth of aggregate demand produce only fluctuations in inflation with no effect on output.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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