3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.
3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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3) Suppose that a fall in consumer spending causes a recession
a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-
b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.
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