Suppose the Current Rate of Inflation Is 4 Percent

question 107

Essay

Suppose the current rate of inflation is 4 percent. However, if real and potential GDP are to be equal, inflation will need to be at 6 percent. Show, using the AD curve and the IA line, where real GDP is relative to potential GDP under these circumstances.

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Definitions:

Disbursement Float

The time lag between when a check is issued by a payer and when the funds are deducted from the payer's bank account.

Checks

Written, dated, and signed instruments that direct a bank to pay a specific sum of money to the bearer or a designated recipient.

Clear

To complete a transaction successfully, particularly in financial contexts where payments or securities are settled.

Average Amount

A measure obtained by dividing the sum of a set of values by the number of values in the set, often used in financial analysis.