Question

Figure: Two SRAS Curves Inflation rate, LRAS SRAS, (* = 5%) SRAS2 (= - 3%) 7% ------- Real GDP growth rate

(Figure: Two SRAS Curves) The figure shows the AD-AS model with two SRAS curves. Which of the following is TRUE of Point A?

		The actual inflation rate is 3%, and the expected inflation rate is 5%.
		The actual inflation rate and the expected inflation rate are both 5%.
		the actual inflation rate is 5%, and the expected inflation rate is 3%.
		The actual inflation rate and the expected inflation rate are both 3%. What is the answer and reason??

Answer 1

Option B.

At point A, the actual inflation rate is given by the level of inflation rate on the vertical line corresponding to point A, thus, actual inflation rate is equal to 5 per cent. Along the SRAS1 curve, the expected inflation rate in the economy is equal to 5 per cent. Thus, at point A, the actual and expected inflation rate are both 5 per cent.