Business Fluctuations: End of Chapter Problem
Let’s have some practice with the aggregate demand curve. If you want to draw it in your familiar 𝑦=𝑏+𝑚𝑥
�
=
�
+
�
�
format, you can think of it this way:
inflation = (growth in money + growth in velocity) – real growth
a. What is being held constant on a fixed aggregate demand curve?
real GDP growth (growth in 𝑌
�
)
inflation (growth in 𝑃
�
)
spending growth (growth in 𝑀
�
+ growth in 𝑣
�
)
b. What has to change to make an aggregate demand curve shift?
inflation (growth in 𝑃
�
)
real GDP growth (growth in 𝑌
�
)
spending growth (growth in 𝑀
�
+ growth in 𝑣
�
)
c. Identify each statement that must be false according to the quantity theory.
Last year, spending grew at 10%, real growth was 4%, and inflation was 6%.
Last year, spending grew at 4%, real growth was −2%, and inflation was 6%.
Last year, spending grew at 100%, real growth was 0%, and inflation was 20%.
Last year, spending grew at 5%, real growth was 5%, and inflation was 2%.
Last year, spending grew at 10%, real growth was 5%, and inflation was −5%.