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Answer on Macroeconomics Question for Valerie Rasmussen

Question #6092
In the late 1990s a growing number of economists argued that world policymakers were focusing too much on fighting inflation. The economists also argued that the technical level of potential output had risen. Show their argument using the AS/AD model.
Expert's answer
The main reason of world policymakers focusing on fighting inflation is the fact that both instruments which managed the demand side of the economy, fiscal and monetary policies, where used for curbing inflation at a time when there was a technical boom in the economy in the form of enhancing productivity. This causes the increase in the potential output of the economy and therefore had a favorable impact on efforts to curb inflation. Such productivity improvement (due to decline in prices of computers) during the 1990s is the leading factor that results in the shift of the aggregate supply curve of the economy as shown in the figure.
<img src="data:image/png;base64,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" alt="">
Technological progress shifts aggregate supply to the right from AS1 to AS2. The technical progress led to the production of a higher level of products from the same amount of inputs because of productivity improvement which caused the prices in the economy to calm down automatically. This is visible in the graph where the aggregate price in the economy falls from P1 to P2. Therefore, the argument made by the economist during this period of unneeded stress being given on fighting inflation is valid from the macroeconomic point by looking at the aggregate demand and supply curve. Due to technical progress the shift of the AS causes the increase in real GDP (output).

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21.01.2013 08:29

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