Let Aggregate Demand in an Economy with a Potential GDP

question 2

Multiple Choice

Let aggregate demand in an economy with a potential GDP of 10,000 be represented initially by AD = 8,400 + 2,000/P. Suppose that over the course of one year, potential GDP rose to 10,500 and aggregate demand shifted to AD = 9,000 + 2,000/P. You should expect to have witnessed, over the course of that year,

• A) no price inflation.
• B) price inflation of 6.67 percent.
• C) price disinflation of 6.67 percent.
• D) price inflation of 1.67 percent.
• E) price disinflation of 1.67 percent.

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Definitions:

Utility Function

An economic model that represents a consumer's preference ranking for various bundles of goods by assigning a utility value to each bundle.

Pareto Optimal Allocation

A distribution of resources in an economy where improving the situation of one person necessitates detriment to another.

Utility Function

A mathematical representation of how a consumer ranks different bundles of goods based on their level of satisfaction or utility.

Endowed

Refers to the initial allocation of goods, resources, or wealth an individual or entity possesses.