Explain why some shifts to the aggregate demand curve are temporary and why some are permanent
What will be an ideal response?
In long-run equilibrium, aggregate expenditure, real GDP, and potential GDP are all equal, so aggregate expenditure cannot exceed potential GDP in the long run. If aggregate expenditures increase beyond potential GDP in the short run, shifting the aggregate demand curve to the right, they must decrease back to potential GDP in the long run, so the shift is temporary. So, changes in autonomous expenditure will cause a temporary shift of the aggregate demand curve.
Changes in the central bank reaction function cause the aggregate demand curve to shift permanently. For example, if the central bank announces a higher inflation target, it is announcing that it will accept a higher rate of inflation for any given level of real GDP. So, when real GDP equals potential GDP, the central bank is willing to accept a higher inflation rate. This allows for a permanent shift of the aggregate demand curve.
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Suppose there is a temporary supply shock because of a war in the Middle East, then, ceteris paribus, the ensuing cost push shock ________
A) would lead to a temporary increase in prices but a permanent reduction in output B) would lead to a temporary increase in output but a permanent increase in inflation C) would lead to a temporary decrease in output but a permanent increase in inflation D) all of the above E) none of the above
If a corporation acquires more debt to make itself a less attractive target for hostile takeover,
a. the value of the stock rises b. the proceeds are used to pay stockholders a one-time dividend c. this strategy will fail since it won't be able to raise funds d. it will use these funds to purchase new equipment e. the corporation will become a more attractive target