Question

Use the following information for the next 7 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions Assume that wages and prices are sticky and that we start at a long-run equilibrium. Assume that at this initial point, the growth rate of the money supply is 7%, the growth rate of the velocity of money is 0% and that the real economic growth rate is 3%. Now assume that there is a negative real shock. After the negative real shock, the inflation rate in the economy is 9%. Now assume that the federal government decides to increase government spending in order to combat the situation resulting from the rise in oil prices. After the increase in government spending the growth rate of the velocity of money is 5%. Question 42 2 pts After the negative real shock (Point 2), what is the level of expected inflation for the SRAS curve? Hint: enter your answer without a % sign Example: if the answer is 5%, enter 5.

Answer 1

Well expected inflation according to keynesians will continue to be 9 since here expected inflation is determined by past inflation.