The goal of this exercise is to illustrate the individual steps of the disinflationary process in an economy. Currently, the economy of Winterspring is in an equilibrium depicted by point Е on the graph. Suppose that Winterspring has been suffering from inflation for several years. Consequently, the individuals in this economy have developed inflationary expectations and they expect inflation to be present in the near future as well. The central bank implements a "no monetary validation" policy to reduce the inflation and to eliminate the inflationary expectations in Winterspring. In the first phase of the disinflationary process, the bank will stop monetary validation and the level of aggregate demand will be stable as shown by the AD curve. The AS curve, however, will shift as a result of the inflationary expectations in the economy. 1.) Using the three-point curve drawing tool, show the new AS curve at the end of the first phase of the disinflationary process. Label this curve AS₁. 2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of the first phase of the disinflationary process. Label this point E₁. Carefully follow the instructions above, and only draw the required objects. In the second phase of the disinflationary process, the level of wages will continue to rise due to the inflationary expectations and the AS curve will continue shifting. 1.) Using the three-point curve drawing tool, show the new AS curve at the end of the secondary phase of the disinflationary process. Label this curve AS2- 2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of the secondary phase of the disinflationary process. Label this point E2. Carefully follow the instructions above, and only draw the required objects.
The goal of this exercise is to illustrate the individual steps of the disinflationary process in an economy. Currently, the economy of Winterspring is in an equilibrium depicted by point Е on the graph. Suppose that Winterspring has been suffering from inflation for several years. Consequently, the individuals in this economy have developed inflationary expectations and they expect inflation to be present in the near future as well. The central bank implements a "no monetary validation" policy to reduce the inflation and to eliminate the inflationary expectations in Winterspring. In the first phase of the disinflationary process, the bank will stop monetary validation and the level of aggregate demand will be stable as shown by the AD curve. The AS curve, however, will shift as a result of the inflationary expectations in the economy. 1.) Using the three-point curve drawing tool, show the new AS curve at the end of the first phase of the disinflationary process. Label this curve AS₁. 2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of the first phase of the disinflationary process. Label this point E₁. Carefully follow the instructions above, and only draw the required objects. In the second phase of the disinflationary process, the level of wages will continue to rise due to the inflationary expectations and the AS curve will continue shifting. 1.) Using the three-point curve drawing tool, show the new AS curve at the end of the secondary phase of the disinflationary process. Label this curve AS2- 2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of the secondary phase of the disinflationary process. Label this point E2. Carefully follow the instructions above, and only draw the required objects.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Price Level (P)
Economy of Winterspring
879
Eo
ADO
4,516
estion Viewer
Real GDP (Y)
AS ASO
Transcribed Image Text:The goal of this exercise is to illustrate the individual steps of the disinflationary process in an
economy. Currently, the economy of Winterspring is in an equilibrium depicted by point Е on the
graph.
Suppose that Winterspring has been suffering from inflation for several years. Consequently, the
individuals in this economy have developed inflationary expectations and they expect inflation to be
present in the near future as well.
The central bank implements a "no monetary validation" policy to reduce the inflation and to
eliminate the inflationary expectations in Winterspring.
In the first phase of the disinflationary process, the bank will stop monetary validation and the level
of aggregate demand will be stable as shown by the AD curve. The AS curve, however, will shift as
a result of the inflationary expectations in the economy.
1.) Using the three-point curve drawing tool, show the new AS curve at the end of the first phase of
the disinflationary process. Label this curve AS₁.
2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of
the first phase of the disinflationary process. Label this point E₁.
Carefully follow the instructions above, and only draw the required objects.
In the second phase of the disinflationary process, the level of wages will continue to rise due to
the inflationary expectations and the AS curve will continue shifting.
1.) Using the three-point curve drawing tool, show the new AS curve at the end of the secondary
phase of the disinflationary process. Label this curve AS2.
Questio
2.) Using the point drawing tool, show the equilibrium that the economy will move into at the end of
the secondary phase of the disinflationary process. Label this point E2.
Carefully follow the instructions above, and only draw the required objects.
C
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