In the late 1990s a growing number of economists argued that world policymakers
were focusing too...

Question

In the late 1990s a growing number of economists argued that world policymakers 
were focusing too much on fighting inflation.  The economists also argued that 
the technical level of potential output had risen.  Show their argument using 
the AS/AD model.

David · Accepted Answer

In the late 1990s a growing number of economists argued that world policymakers were 
focusing too much on fighting inflation. The economists also argued that the technical level 
of potential output had risen. Show their argument using the AS/AD model. 
Answer: 
With advancement of technology, skill and knowledge, the same resource now produces 
more than what it was used to produce earlier. This implies that with same level of 
resource, we are now able to produce more than economy’s old capability i.e. now the 
technical level of potential output had risen. This can be shown by rightward shift in the 
short run aggregate supply curve and long run aggregate supply curve. As shown figure A, 
where long run aggregate supply curve has shifted rightward from Y* to Y**, implying that 
technical level of potential output had risen.   
Figure A:
Demonstrate the effect of expansionary monetary policy in the AS/AD model when the 
economy is: 
Answer: 
Aggregate demand (AD) is sum total of final goods and services demanded in the economy 
at a given point of time. And it is calculation by summing Investment expenditure (I), 
government expenditure (G), consumption expenditure (C) and net export (X-M) i.e. 
AD = C+ I+G+X-M ………………… (1) 
It is negatively related to price level. An increase in the price level lowers the real money 
supply,

In the late 1990s a growing number of economists argued that world policymakers were focusing too much on fighting inflation. The economists also argued that the technical level of potential output...

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