Documented Problem Solving: Adjustment of Output and Inflation to a Demand Shock

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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project
Initial Publication Date: September 27, 2010

Summary

In this macroeconomics problem, students check to see whether they understand the role nominal aggregate demand and inflation expectations play in determining the economy's output level and inflation rate.

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Learning Goals

Students will:

  • understand the relationship between nominal GDP growth, real GDP growth, and the inflation rate;
  • describe how nominal aggregate demand determines the location of an economy on a short-run Phillips Curve;
  • recognize that changes in inflation expectation change the path an economy follows as it adjusts to a demand shock.

Context for Use

This activity is appropriate for an intermediate macroeconomics class after students have learned the short-run Phillips Curve, long-run Phillips Curve framework. The context of the problem is the theory as presented by Robert Gordon in Macroeconomics, 11th edition.

Description and Teaching Materials

This is a sheet that presents a problem and explains how students should document their problem solving steps.
Documenting a Solution to a Macroeconomics Problem (Microsoft Word 2007 (.docx) 18kB Apr6 10)



Teaching Notes and Tips

Growth rates have to be calculated in log points for nominal GDP growth to precisely equal real GDP growth plus the inflation rate.

Assessment

Students achieve the learning goals if they can answer the three questions accurately and present an understandable account of the thought process they used to arrive at those answers.

References and Resources