Question

The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be?

a) 3%
b) Less than 3%
c) More than 3%
d) Cannot be determined from the information provided

Answer 1

According to the AD/AS model, if economic growth is 3% and AD grows at the same rate, there should be no change in the inflation rate assuming AS also grows at the same rate. However, the real live inflation rate cannot be determined from this information alone as the AD/AS model cannot account for all real economic dynamics.

Step-by-step explanation:

In the context of the AD/AS model, if economic growth is 3% per year and aggregate demand (AD) is growing at the same rate, theoretically, there should be no change in the inflation rate if aggregate supply (AS) is also growing at the same rate. This is because the growth of AD is matched by an equal growth in production, keeping prices stable.

However, the actual inflation rate cannot be determined from the information provided alone because the AD/AS model is a static representation and does not account for the dynamic interactions and other variables in the real economy that could influence the inflation rate.

Therefore, the answer to the question is d) Cannot be determined from the information provided.