Question
At point A, inflation is equal to the underlying rate
of inflation and output is at the level of output consistent with the equilibrium unemployment rate. If the economy were at point B, you would expectSolution
When we are not at the equilibrium rate of unemployment, the rate of underlying inflation changes. Since we don't know what aggregate demand is doing, we can't meaningfully speak of excess supply or demand. Our presumption will be that aggregate demand and short-run aggregate supply are equal.
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