Author Question: In the Keynesian model, changes in aggregate supply a. are the primary determinant of inflation. ... (Read 116 times)

awywial · **on:** Jun 30, 2018

In the Keynesian model, changes in aggregate supply

a. are the primary determinant of inflation.
b. could only destabilize the economy.
c. are ignored.
d. None of the above

Question 2

Why are changes in the output gap larger than changes in the unemployment gap? Why is the relationship expressed in Okun's law not affected by inflation or expected inflation?

What will be an ideal response?

FergA · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

Common sense suggests that output and unemployment must be negatively-related. However, the link between the two is employment. Since the productivity of employed workers can vary, output has extra flexibility. Moreover, even when employment is changing along with output, not all of the employment change corresponds to a change in unemployment, since new employees might be new entrants to the labor force, and employees who leave their jobs might leave the labor force and not be counted among the unemployed. All these connections between output, employment, the labor force, and unemployment are real; they do not involve any price adjustments.