Short-run AS upward sloping because:

Rationale

Nominal GDP 2 %, inflation 4 % is consistent with contraction.

When inflation exceeds the growth rate of nominal GDP, it indicates that the economy is not expanding adequately to keep pace with rising prices, often leading to a contraction in real economic activity.

A (wages flexible) YOUR ANSWER

In this scenario, real GDP growth of 4% indicates an expanding economy, as it reflects an increase in the value of goods and services produced, adjusted for inflation. With inflation at 2%, the economy is growing faster than the average price level is rising, which is not indicative of contraction.

B (wages sticky) CORRECT

This option presents a situation where real GDP is increasing while prices are falling (deflation). An increase in real GDP signifies economic growth, and deflation typically occurs when demand decreases, which could lead to contraction. However, because real GDP is growing, this combination does not represent contraction.

C (high competition) YOUR ANSWER

In this case, nominal GDP growth of 4% with inflation at 2% results in a real GDP growth of approximately 2% (4% - 2%). This indicates modest economic growth rather than contraction, as the economy is still expanding in real terms despite inflationary pressures.

D (AD downward) YOUR ANSWER

Here, nominal GDP growth of only 2% coupled with inflation at 4% results in a negative real GDP growth rate (approximately -2%). This indicates that the economy is contracting since the growth in prices exceeds the nominal growth in output, leading to a decrease in the real value of goods and services produced.

Conclusion

Contraction in an economy is evidenced when inflation outpaces nominal GDP growth, leading to a decline in real GDP. Among the options provided, only the combination of nominal GDP at 2% and inflation at 4% indicates a contraction, as it results in a negative growth rate of real GDP. This scenario highlights economic distress, where rising prices hinder overall economic performance.

Short-run AS upward sloping because:

Nominal GDP 2 %, inflation 4 % is consistent with contraction.

Related Questions

Related Quizzes

How familiar were you with this question?

Report an Issue

Rate this Practice Test