In the basic AD/AS macro model,which of the following events would cause stagflation?
A)a large decrease in wages
B)a large increase in business confidence
C)a large increase in the net tax rate
D)a large increase in the price of raw materials
E)a large increase in labour productivity

Question

Quizplus · Accepted Answer

Stagflation is a situation where there is both inflation and economic stagnation. In the AD/AS model, this can occur due to a supply shock that increases input costs for businesses, such as a large increase in the price of raw materials. This shifts the short-run aggregate supply (SRAS) curve to the left, leading to higher prices and lower output, resulting in both inflation and economic stagnation. A decrease in wages (A) or an increase in labor productivity (E) would shift the SRAS curve to the right, leading to lower prices and higher output, which would not cause stagflation. An increase in business confidence (B) would shift the AD curve to the right, which would increase output and potentially cause inflation, but not necessarily economic stagnation. An increase in the net tax rate (C) would also shift the AD curve to the left, but it would have mixed effects on inflation and output, depending on other factors such as the size and composition of government spending.

In the Basic AD/AS Macro Model,which of the Following Events