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Draw an AS/AD diagram

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A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate and remained at that low level for a year or longer? Explain your answer in a few sentences.

B) Draw an AS/AD diagram illustrating your answer to part (A) That is, draw an AS/AD diagram which shows what happens as an economy operates for a sustained time at a level of actual unemployment that is lower than the unemployment level at potential RGDP. Be sure to label all lines and axes in your diagram clearly.

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Solution Summary

Inflation rate is clearly evaluated, providing an example of an aggregate supply and demand diagram.

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Inflation rate will accelerate if actual unemployment rate declined to a level lower than full employment unemployment rate (called the natural rate of unemployment). The output produced at full employment is called the potential GDP and is shown by the long run aggregate supply curve (see the attached graph), and we say an economy is ...

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