ECON302 CHP23
6. A rise in inflation causes monetary policymakers to raise real interest rates. This reduces
planned expenditures and lowers the level of output demanded for goods market equilibrium.
The opposite occurs when inflation falls; therefore, goods market equilibrium will occur at a
lower level of output when inflation rises and at a higher output when inflation falls.
The SRAS curve slopes upward in order to reflect the increase in inflation when the economy’s
output exceeds the potential output level YN in the short run and the increase in the inflation
that occurs when output is below YN.
8. The factors that shift the SRAS curve are changes in inflation, price shocks, and persistent
output gaps. None of these factors shift the LRAS curve because prices and wage flexibility
ensure that in the long run, the economy produces at its potential output level. The potential
output depends on capital, labor, and available technology for producing goods and services
However, a change in potential output shifts the LRAS curve and also the SRAS because it
changes the output gap at any level of output.
18. Technological change and infrastructure improvements affect the LRAS curve. More fuelefficient cars result in a decrease in the demand for gas, and at the same time, the innovations
in energy production make it possible to increase the supply of energy at any price level.
Improvements in infrastructure make transportation of goods more efficient and raise
productivity. The LRAS curve will shift to the right, and the new positive output gap will cause a
shift in the SRAS curve to the right. This will lead to a higher level of output and a lower level of
inflation in the long run.
19. Because goods will cost more, the national sales tax will raise production costs and the SRAS
curve will shift to the left as well as the AD curve will shift to the left. The intersection of SRAS
with AD would be then at a higher level of inflation and lower level of output.
22. If the public assumes that the fed officials are not that worried about inflation, the expected
inflation will increase shifting the SRAS curve to the left. During 2017, fed officials were in a
difficult position of worrying when they might have to increase interest rates to fight inflation
as the economy had largely recovered but inflation remained low. Increasing interest rates too
late could fuel expectations about higher inflation while increasing interest rates too early will
slow down the recovery, and even send the economy into recession (They even applied
negative interest rates on bonds).