In the basic model with an AD and LRAS curve only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will:

Question

Quizplus · Accepted Answer

With spending growth of 10% and a Solow growth rate of 5%, the economy is experiencing inflation at a rate of 5%. If the Solow growth rate falls to 3%, then the LRAS curve shifts to the left, leading to higher prices and inflation. Therefore, inflation will increase from 5% to 7%.

In the Basic Model with an AD and LRAS Curve