1) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment" and becomes especially steeply sloped beyond "full employment" RGDP (hint: this topic is not discussed in your text... you will need to understand this week's lecture notes to answer this).
2) Why might the rate at which the Aggregate Supply curve shifts vertically upward increase when an economy produces beyond full employment. (Hint: think about the effect of very low unemployment rates on the balance of bargaining power between employers and workers)
3) Explain why inflation rates are likely to rise when an economy expands beyond full employment capacity output. Draw an aggregate supply-aggregate demand diagram to illustrate your answer. (Hint: utilize your answers to #1 & #2 to answer this question)
4) Suppose worker productivity increased at the rate of 1.9% per year. If the labor force grew by 1.5% per year, what rate of increase in RGDP would be sustainable without increasing inflation pressures?
5) In the period 2000-2003, the RGDP (real GDP adjusted for inflation) growth rate in the US averaged 2.39% per year, while inflation rates remained at around 2.53% per year. In the latter half of the 1970's, by contrast, inflation rates accelerated markedly even though annual growth in RGDP did not exceed 3%.
Now in 2012-2013 the US economy is slowly recovering from the great recession, what will determine whether it can recover in the coming years at strong growth performance similar to 2003-2006 without triggering a noticeable acceleration of inflation?
6) Illustrate how each of the following events would shift the AS schedule and potential RGDP, thereby altering equilibrium prices and output levels in the economy. Use an aggregate supply-aggregate demand diagram in your explanation and assume that the economy is initially at full employment. Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering these questions. We will discuss AD shifts in next week's lesson.
a) an increase in the general level of money wages
b) an increase in the price of imported oil and related energy products.
c) a decrease in the level of US interest rates
d) an increase in the productivity of labor
e) an increase in the expected inflation rate
f) an increase in the labor force growth rate.