Question

"In the dynamic AD–AS model, which variable is NOT affected by

central bank policy?
a.The inflation rate
b.The real interest rate
c.The expected inflation rate
d.The nominal i"

Answer 1

The expected inflation rate is not directly affected by central bank policy. If economic growth and aggregate demand both grow at 3% in a year and the economy is at potential GDP, the AD-AS model suggests minimal inflationary pressure, unless AD outpaces potential GDP.

Step-by-step explanation:

You've asked about the dynamic AD-AS (Aggregate Demand-Aggregate Supply) model and the variable not affected by central bank policy. In this model, only the expected inflation rate is typically not directly influenced by a central bank's policy actions. The central bank controls the money supply and influences other variables such as the inflation rate, the real interest rate, and the nominal interest rate.

If economic growth and aggregate demand are both growing at a 3% per annum rate, and the economy is already at potential GDP, the AD-AS model would suggest that there is no gap between the actual and potential GDP, and therefore, inflationary pressures would be minimal. However, if aggregate demand grows faster than potential GDP, this leads to an increase in the overall price level and thus higher inflation.