The economy begins in long-run equilibrium. Then one day, the president appoints a new chairman of the Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy.
Note: You will not be graded on any changes you make to the graph, but you may use it to help you understand the scenario described.
Aggregate Demand Aggregate Supply LRAS Price Level Quantity of Output Aggregate Demand Aggregate Supply LRAS
As a result of this news, people will expect the price level to_____ , which, in turn, will cause the nominal wage that workers and firms agree to in their new labor contracts to be_____ than it would be otherwise. This_____ the profitability of producing goods and services at any given price level, which would cause the short-run aggregate-supply curve to shift to the______ . If aggregate demand is held constant, this shift in the aggregate-supply curve will cause the price level to______ and the quantity of output produced to______. (fill in the blanks).