Questions: Suppose that the dynamic aggregate demand curve in Swaziland is determined by the equation M + v = 6%. Using this information, draw Swaziland's dynamic aggregate demand curve on the graph.

Solution Steps

The given equation $\tilde{M} + \tilde{v} = 6\%$ represents the dynamic aggregate demand curve. $\tilde{M}$ is the growth rate of the money supply, $\tilde{v}$ is the growth rate of the velocity of money, and their sum equals the nominal GDP growth rate. Since inflation ($\pi$) equals nominal GDP growth minus real GDP growth ($\tilde{y}$), we can rewrite the equation as $\pi = 6\% - \tilde{y}$.

We can choose two arbitrary values for $\tilde{y}$ and calculate the corresponding inflation rate $\pi$.

• If $\tilde{y} = 5\%$, then $\pi = 6\% - 5\% = 1\%$. So, one point is $(5, 1)$.
• If $\tilde{y} = 8\%$, then $\pi = 6\% - 8\% = -2\%$. So, another point is $(8, -2)$.

Plot the two points $(5, 1)$ and $(8, -2)$ on the graph. Draw a straight line through these two points, extending it to the edges of the graph. This line represents Swaziland's dynamic aggregate demand curve.

Final Answer: