Author Question: How does the natural rate hypothesis relate to the AS-AD model? What will be an ideal ... (Read 55 times)

Bob-Dole · **on:** Jun 29, 2018

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 · **Reply #1 on:** Jun 29, 2018

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