Short run Philips Curve given real GDP, Inflation and Output ratio. Government policies (accommodating policy, neutral policy and extinguishing policy) and calculation of output ratio, inflation rate and growth rate of real and nominal GDP.
Suppose that natural real GDP is constant. For every 1 percent increase in the rate of inflation above its expected level, firms are willing to increase real GDP by 2 percent. The output ratio is initially 100 and the inflation rate equals 2 percent.
Illustrate what is the growth rate of nominal GDP in the economy?
An adverse supply shock raises the inflation rate associated with every output ratio by 3 percentage points.