How will a an unexpected 3 percent fall in the price level i

How will (a) an unexpected 3 percent fall in the price level in the goods and services market differ from (b) 1 percent inflation when 4 percent inflation had been expected? What impact would (a) and (b) have on the real price of resources, profit margins, output, and employment. Explain.

Solution

cASE 1

price = decreases

profit margin = decreases

output= decreases

employment = decreases

case 2

price = increases

profit margin = increases

output = increases

employment = increases