Chapter 31, Problem 2P

To determine

Concept Introduction:

Classical model of price level: It suggests that it is the supply in the economy that creates its own demand. The model suggests that economy is always at full level of employment. Hence the aggregate supply curve is vertical. Any change in the quantity of money supply is reflected as a change in the aggregate price level even in the short run.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation.

Hyperinflation: When the inflation rate is very high and is usually for a longer duration then it is termed as hyperinflation.

Natural rate of unemployment: It is the rate of unemployment when real rate of output is equal to the potential output in the economy. At such a point economy does not have recessionary gap or inflationary gap.