1) Explain why the Aggregate
Supply curve becomes increasingly steeply sloped at levels of RGDP near
“full employment” and becomes especially steeply sloped beyond
“full employment” RGDP (hint: this topic is not discussed in your
text… you will need to understand this week’s lecture notes to answer this).
2) Why might the rate at which the
Aggregate Supply curve shifts vertically upward increase when an economy
produces beyond full employment. (Hint: think about the effect of very low
unemployment rates on the balance of bargaining power between employers and
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3) Explain why inflation rates are
likely to rise when an economy expands beyond full employment capacity output. Draw
an aggregate supply-aggregate demand diagram to illustrate your answer.
(Hint: utilize your answers to #1 & #2 to answer this question)
4) Suppose worker productivity
increased at the rate of 1.9% per year. If the labor force grew by 1.5% per
year, what rate of increase in RGDP would be sustainable without increasing
5) In the period 2000-2003, the RGDP
(real GDP adjusted for inflation) growth rate in the US averaged 2.39% per
year, while inflation rates remained at around 2.53% per year. In the latter
half of the 1970’s, by contrast, inflation rates accelerated markedly even
though annual growth in RGDP did not exceed 3%. Now in 2011-12, US economy was
slowly recovering from the great recession, what will determine whether it can
in the coming years a strong growth performance similar to 2003-2006 without
triggering a noticeable acceleration of inflation?