ChocolateDrop Posted October 22, 2012 Report Share Posted October 22, 2012 Hey guys,Im doing exam practice and I got this question and I'm completely stumped. The only answer I can think of is 'yes it is, because an increase in aggregate demand means one step closer to full employment.' But I don't feel this is enough to get any marks at all. Any suggestions as to how to improve my answer? Reply Link to post Share on other sites More sharing options...
Dimitris Posted October 22, 2012 Report Share Posted October 22, 2012 Think of inflation... in the keynesian diagram if the current equilibrim is in a quantity before the YFE but close to it (in b phase or even in the beginining of c) this means that if AD increases too much it will cause demand pull inflation. Reply Link to post Share on other sites More sharing options...
ChocolateDrop Posted October 22, 2012 Author Report Share Posted October 22, 2012 Think of inflation... in the keynesian diagram if the current equilibrim is in a quantity before the YFE but close to it (in b phase or even in the beginining of c) this means that if AD increases too much it will cause demand pull inflation.I did think of inflation, which is a change in price levels. And AD goes up drastically so does price levels. But if everyone in the economy had a job, I don't see how high inflation would be bad. Surely they'd be able to afford the rise in prices? Reply Link to post Share on other sites More sharing options...
Ezak Posted October 22, 2012 Report Share Posted October 22, 2012 (edited) Think of it like this. Whenever inflation happens, the salary will take more time to go up than it will take for the prices to increase. So there will be a time lag between the increase of the average wage level and the increase in the average price level.To be more specific, you could also ask what would cause this increase in AD. I mean, if we decided to produce 1 gazillion kilos of cotton this would increase AD massively, but we wouldn't be happier as the resources are not allocated correctly according to the interest of the people. Getting a little ideological here, but you get the point. Edited October 22, 2012 by Ezak Reply Link to post Share on other sites More sharing options...
Geldyn Posted November 20, 2012 Report Share Posted November 20, 2012 Also, if the economy were already at full employment, the increase in Aggregate Demand would fail to actually do anything - AS is perfectly inelastic at this point, so even if AD increased, there would be no increase in the quantity produced. Meaning that there would be no positive effects of the increase in AD, only a rise in prices.This is a little off-topic, but it may also be good to go back to the costs of inflation if you can't see anything wrong with it - there are problems other than people not being able to keep up with the increase in prices (although this is the main problem) - but even assuming everyone's wages kept up with inflation, companies face increased inefficiency from menu costs (having to constantly reprint price lists) and consumers face shoe-leather costs (losing time because they look around longer for a cheaper price, as everything now seems more expensive). Reply Link to post Share on other sites More sharing options...
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