Why is a higher-than-normal GDP growth rate accompanied by rise in inflation and fall in unemployment? b) Explain with the reason and graph, the price elasticity of demand in case of i) Perfect competition vis-à-vis the monopoly ii) Monopolistic vis-à-vis the Monopoly? [2+2]

(a) In an economy when GDP is higher than normal growth it is accompanied by rise in inflation and fall in unemployment because increase in aggregate demand in the economy leads to higher GDP growth and fall in unemployment and rise in inflation. This phenomena is explained by Phillips curve by A.W. Phillips. Phillips curve is a downward sloping straight line, where we measure unemployment on the horizontal axis and inflation rate on the vertical axis. It is a graph which shows inverse relationship between unemployment and rate of inflation in an ecoonomy. As demand increase in an economy, prices increases and it leads to increase in inflation which further decreases unemployment rate due to their negative relationship.

(b- i) In a perfect competition market, since all goods are perfectly substitute in the market. So the price is given n the market. They are price takers. Hence the price elasticity or the demand curve is perfectly elastic, that is, it is a straight horizontal line on price-quantity plane ,whereas, in monopoly market the demand curve is downward sloping on price-quantity plane because of the fact that they have a market power and they can increase price of a good without losing their customers.

(b-ii) In a monopolistic market, the firms have relatively low degree of market power so in short run the demand curve is downward sloping but as it approaches in long run it becomes highly elastic, that is, it becomes sensitive to price changes, whereas, in monopoly market firms have a market power and the demand curve is always downward sloping on price-quantity plane.