Aggregate demand and supply

Aggregate demand and supply

Macropoland, a country that is a natural gas and oil importer, has a natural rate of unemployment (at the full employment level of GDP) that is about 4.5%, and the long run average rate of inflation over time has been about 2%. However, during the period 1973-1974, the country experienced an inflation rate of about 15% while simultaneously experiencing unemployment of nearly 13%.

At the present time, Macropoland is experiencing very sluggish consumption and investment (a result of a fall in the housing market), and unemployment has again edged up to around 9%. Inflation is very low at 0.4%.

Macropoland has just hired you as their economic advisor. You have a big job ahead of you. Using your knowledge of aggregate demand and aggregate supply, can you explain what happened in these two time periods?

Sample Solution