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Question 2: Factor Price Rigidity Suppose that an economy starts at its natural rate of GDP, in both short-run and long-run equilibrium. Suppose also that there is a large decline in the Demand for Investment in the economy. a) What would we expect to happen to both the price level and Real GDP in the Short-Run? Has this created a recessionary or an inflationary gap? Prices and Y decrease. It is a recessionary gap. b) As the economy progresses back.

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Question 2: Factor Price Rigidity Suppose that an economy starts at its natural rate of GDP, in both short-run and long-run equilibrium. Suppose also that there is a large decline in the Demand for Investment in the economy. a) What would we expect to happen to both the price level and Real GDP in the Short-Run? Has this created a recessionary or an inflationary gap? Prices and Y decrease. It is a recessionary gap. b) As the economy progresses back

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  • 1. Question 2: Factor Price Rigidity Suppose that an economy starts at its natural rate of GDP, in both short-run and long-run equilibrium. Suppose also that there is a large decline in the Demand for Investment in the economy. a) What would we expect to happen to both the price level and Real GDP in the Short-Run? Has this created a recessionary or an inflationary gap? Prices and Y decrease. It is a recessionary gap. b) As the economy progresses back