2. The Phillips curve in the short run and long run The following graph plots aggregate demand (AD) and aggregate supply (AS) for the imaginary country of Patagonia in the year 2027. Suppose the natural level of output in this economy is $7 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. PRICE LEVEL 108 107 108 105 LRAS AS 104 103 AD 2027 ADB ADA 102 101 10 100 2 10 OUTPUT (Trillions of dollars) 12 14 16 * 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 ADB, 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 A 7% B 6% 96 96
2. The Phillips curve in the short run and long run The following graph plots aggregate demand (AD) and aggregate supply (AS) for the imaginary country of Patagonia in the year 2027. Suppose the natural level of output in this economy is $7 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. PRICE LEVEL 108 107 108 105 LRAS AS 104 103 AD 2027 ADB ADA 102 101 10 100 2 10 OUTPUT (Trillions of dollars) 12 14 16 * 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 ADB, 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 A 7% B 6% 96 96
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 38QA
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Transcribed Image Text:2. The Phillips curve in the short run and long run
The following graph plots aggregate demand (AD) and aggregate supply (AS) for the imaginary country of Patagonia in the year 2027.
Suppose the natural level of output in this economy is $7 trillion.
On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy.
PRICE LEVEL
108
107
108
105
LRAS
AS
104
103
AD
2027
ADB
ADA
102
101
10
100
2
10
OUTPUT (Trillions of dollars)
12
14
16
*
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 ADB, 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
A
7%
B
6%
96
96
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