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 Iguazu 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 LRAS AS 108 105 104 103 102 101 A AD AD 100 2 4 10 12 14 16 OUTPUT (Trillions 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 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. A B Unemployment Rate 7% 6% Inflation Rate 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.)
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 Iguazu 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 LRAS AS 108 105 104 103 102 101 A AD AD 100 2 4 10 12 14 16 OUTPUT (Trillions 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 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. A B Unemployment Rate 7% 6% Inflation Rate 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.)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 Iguazu 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
LRAS
AS
108
105
104
103
102
101
A
AD
AD
100
2
4
10
12
14
16
OUTPUT (Trillions 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 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.
A
B
Unemployment Rate
7%
6%
Inflation Rate
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.)
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