On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. 108 107 105 104 AD 2007 102 101 100 D 2 LRAS AS 10 AD ADA 12 14 16 OUTPUT (Trilions of dollars) Outcome C Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled AD, resulting in the outcome given by point B. The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the price level at outcome A or the price level at outcome B. Complete the table by entering the inflation rate at each potential outcome point. Note: Calculate the inflation rate to two decimal points of precision. Unemployment Rate Inflation Rate 6% 3% 1.96% 2.94% Based on your answers to the preceding parts, use the black line (plus symbol) to draw the short-run Phillips curve (SRPC) for this economy in 2028. (Note: You will not be graded on any changes you make to this graph.) 1 UNEMPLOYMENT RATE (Percent) The short-run Phillips curve is a downward-sloping ▼line: At the natural level of output At the natural rate of unemployment Representing the tradeoff between unemployment and inflation SRPC LRPC Now consider the long-run effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate demand curve remains at AD. The long-run equilibrium that would follow such a policy is designated outcome C. Going back to the first graph, place the grey point (star symbol) at outcome C. Because output at point C is equal to the natural level of output, the unemployment rate associated with outcome C is equal to the natural rate of unemployment. Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph. This line is a vertical At the natural rate of unemployment O At the natural level of output Representing the tradeoff between unemployment and inflation

On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. 108 107 105 104 AD 2007 102 101 100 D 2 LRAS AS 10 AD ADA 12 14 16 OUTPUT (Trilions of dollars) Outcome C Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled AD, resulting in the outcome given by point B. The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the price level at outcome A or the price level at outcome B. Complete the table by entering the inflation rate at each potential outcome point. Note: Calculate the inflation rate to two decimal points of precision. Unemployment Rate Inflation Rate 6% 3% 1.96% 2.94% Based on your answers to the preceding parts, use the black line (plus symbol) to draw the short-run Phillips curve (SRPC) for this economy in 2028. (Note: You will not be graded on any changes you make to this graph.) 1 UNEMPLOYMENT RATE (Percent) The short-run Phillips curve is a downward-sloping ▼line: At the natural level of output At the natural rate of unemployment Representing the tradeoff between unemployment and inflation SRPC LRPC Now consider the long-run effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate demand curve remains at AD. The long-run equilibrium that would follow such a policy is designated outcome C. Going back to the first graph, place the grey point (star symbol) at outcome C. Because output at point C is equal to the natural level of output, the unemployment rate associated with outcome C is equal to the natural rate of unemployment. Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph. This line is a vertical At the natural rate of unemployment O At the natural level of output Representing the tradeoff between unemployment and inflation

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter8: Macroeconomic Equilibrium: Aggregate Demand And Supply

Section: Chapter Questions

Problem 19E

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