Why is a period of stagflation part of the normal aftermath of a period of excessive aggregate demand?
When aggregate demand is excessive, the economy will temporarily produce beyond its normal capacity. Labor markets tighten and wages rise. Machinery and raw materials may also become scarce and so start rising in price. Faced with higher costs, business firms quite naturally react by producing less and charging higher prices, thus giving rise to stagflation. It is the conjunction of inflation and economic stagnation.
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Suppose two firms with differentiated products are competing on price. The reaction curve for Firm 1 is P1 = 4 + 0.5 P2, and the reaction curve for Firm 2 is P2 = 4 + 0.5P1. What is the equilibrium price outcome in this market?
A) P1 = P2 = 4 B) P1 = P2 = 6 C) P1 = P2 = 8 D) P1 = 6 and P2 = 8
After the Civil War, per capita income in the South was relatively low compared with other regions of the United States. Which of the following statements best describes how long it took the South to (almost but not quite. catch up with the rest of the country)
a. About one year. b. About five to ten years. c. About twenty five years. d. Several generations.