In the Late 1990s a Growing Number of Economists

Q. In the late 1990s a growing phone number of economists argued that world policymakers were focusing too much on fighting inflation. The economists also argued that the technical level of electric potential output had arise. Show their argument using the AS/AD model. Ans. During the 1970s and the 1980s inflation had risen to relatively higher levels as compared to the earlier decades. The tightening of the monetary policy was one of the action that channel to the fall inflation rate after remaining high for two continuous decades.But economists in the past have argued that there has been too much stress on fighting inflation during 1990s. The ancient reasons for this argument is the fact that both fiscal and monetary side, i. e. both the instruments which managed the demand side of the economy where apply for curbing inflation at a time when there was a technical boom in the economy in the form of enhancing productivity. This lead to the potential output of the economy to inc rease and therefore had a favourable impact on efforts to curb inflation.This enhancement of productivity (which was primarily out-of-pocket to decline in prices of computers) during the 1990s especially the later half is the chief factor that lead to the shift of the aggregative come out curve of the economy as shown in the figure. The Aggregate supply curve shifts from AS0 to AS1. This shift is because of the technical work up during the concerned level. The technical progress caused the economy to produce a higher level of produce from the similar amount of inputs because of productivity enhancement which caused the prices in the economy to cool off automatically.This is visible in the graphical record where the aggregate price in the economy falls from P0 to P1. Therefore, the argument made by the economist during this period of unneeded stress being given on fighting inflation is valid from the macroeconomic indicate by looking at the aggregate demand and supply curve. T he shift of the aggregate supply due to technical progress backs up the argument stating the fall in economy real prices in aggregate sense due shift of the supply curve.