How does the natural rate hypothesis relate to the AS-AD model? ...

[Bob-Dole]

How does the natural rate hypothesis relate to the AS-AD model?
 
  What will be an ideal response?

Question 2

Goods that are very useful and highly desired are likely to be
 
  A) expensive if they are relatively abundant.
  B) inexpensive if they are relatively abundant.
  C) inexpensive if they are relatively rare.
  D) expensive no matter if they are relatively abundant or rare.

[ebonylittles]

Answer to Question 1

The natural rate hypothesis is the proposition that when the inflation rate changes, the unemployment rate changes temporarily. Eventually, however, the unemployment rate returns to the natural unemployment rate. This definition is in terms of the Phillips curve. In terms of the AS-AD model, the natural rate hypothesis is that increases in aggregate demand temporarily increase real GDP so that it is greater than potential GDP. But eventually real GDP returns to potential GDP so the increase in real GDP above potential GDP is only temporary.

Answer to Question 2

B

[Bob-Dole]

Thanks for the timely response, appreciate it

[pratush dev]

YES! Correct, THANKS for helping me on my review