a. If Solow growth rate shocks do largely explain business fluctuation, while the aggregate demand curve mostly stays fixed, then should prices be higher than usual or lower than usual during a recession?

b. The following chart portrays historical U.S.

data on the relationship between the price level and real GDP. If you take a look at the big swings in the 1970s and early 1980s, especially during recessions, do the data roughly suggest that growth rate shocks or aggregate demand shocks were the primary disturbance?  Lo1

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Deviation from trend 4% 2% Price level 0% -2% -4% -6% 1948 1950 1955 1960 1965 GDP 1970 1973 1980 1985 1990 1995 2000 Source: Bureau of Economic Analysis and author calculations. 2005 Year