Question

If you were an economist working for the U.S. government which of the following would you do unconcerned about maintaining stable prices while stimulating the economy if the economy was held at full employment?

Use the rigid short run model where the AS curve is upward sloping.

Use the rigid long run model where the AS curve is horizontally sloped.

Use the rigid long run model where the AS curve is vertically sloped.

Use the flexible short run model where the AS curve is downward sloping.

Answer 1

Aggregate supply can m be vertical horizontal or it can be upward sloping. because it is given that we are not concerned about maintaining the stability in price level, we would like to adopt a model in which higher prices do not matter. But the economy is already at full employment and we want to stimulate it so we cannot have a vertical aggregate supply curve. This is because then we cannot increase the production/real GDP.

Therefore we are left with an upward sloping aggregate supply curve. If we stimulate the economy by shift in the aggregate demand curve to the right, we will be able to increase the production and real GDP in the short run, and the increase in the prices would be easily ignored because we are not concerned about prices stability.

Select the first option.