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Chapter 23: Q 7. (page 617)

鈥淚f prices and wages are perfectly flexible, then and changes in aggregate demand have a smaller effect on output.鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Step 1. Define aggregate demand.

Aggregate demand is defined as the total amount of demand produced in the economy for all finished goods and services.

02

Step 2. Is the given statement true, false or uncertain?

The sensitivity of inflation to the output gap is symbolized by the symbol 纬. If wages and prices are completely flexible, 纬 will be quite large, indicating a high degree of sensitivity. Changes in aggregate demand would have a tremendous influence on output since aggregate demand is so sensitive.

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Most popular questions from this chapter

If large budget deficits cause the public to think there will be higher inflation in the future, what is likely to happen to the short-run aggregate supply curve when budget deficits rise?

Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.

Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.

If the unemployment rate is above the natural rate of unemployment, holding other factors constant, what will happen to inflation and output?

Classify each of the following as a supply shock or a demand shock. Use a graph to show the effects on inflation and output in the short run and in the long run.

a. Financial frictions increase.

b. Households and firms become more optimistic about the economy.

c. Favorable weather produces a record crop of wheat and corn in the Midwest.

d. Auto workers go on strike for four months.
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