Suppose expected inflation is fixed at zero and we are on the SP curve with p = 2 and Y = 104.If nominal GDP rises (again)by 6 percent
A)the SP curve must now shift up.
B)we must move off the SP curve to where p = 6 and Y = 104.
C)we must slide northeast further up the SP curve.
D)we must move off the SP curve to where p = 2 and Y = 110.

Question

Quizplus · Accepted Answer

Since expected inflation is fixed at zero, any increase in nominal GDP will lead to an increase in real GDP. Therefore, we move up the SP curve, which is a relationship between price level and real output. As nominal GDP rises by 6 percent, the new level of real GDP will be 110 (104 x 1.06), and since expected inflation is zero, the price level (p) will remain at 2. We move further up along the SP curve as we slide northeast because output has increased without increasing the price level. Therefore, the correct choice is C.

Suppose Expected Inflation Is Fixed at Zero and We Are