Defining Economic Terms

Define and discuss

- Stagflation

- Real and nominal variables

- Marginal productivity theory of distribution

- Business cycle

© SolutionLibrary Inc. 9836dcf9d7

Solution Preview curve is SAS0, and the long-run aggregate supply curve is LAS. A decrease in aggregate supply (for example, resulting from an increase in the world price of oil) shifts the short-run aggregate supply curve to SAS1. The economy moves to the point where the short-run aggregate supply curve SAS1 intersects the aggregate demand curve AD0. The price level rises to 117, and real GDP decreases to $6.5 trillion.

ii) Real and Nominal Variables: Real variables are variables measured in terms of the prices of a fixed base year; measures intended to represent physical quantities produced or used. For example: real exchange rate measures the quantity of foreign goods that can be obtained in exchange for one domestic good. Similarly, other examples are real GDP, real interest rate, real wage etc.

Nominal variables are variables measured in terms of current market prices. For example: nominal exchange rate measures the number of units of foreign currency that can be purchased with one unit of the home currency. Similarly, other examples are nominal GDP, nominal interest ...