A shock to aggregate supply will have different outcomes when there are different assumptions about the formation of the level of expected inflation. One path assumes that the level of expected inflation equals lagged inflation. The level of expected inflation changes over time. The second path assumes the level of expected inflation is anchored to a specific value and never changes. Begin in medium-run equilibrium where actual and expected inflation equal 2% in period t. Suppose the economy is at initial equilibrium at point A, as shown in the graph on the right, and there is a permanent increase in the price of oil in period t +1. How does the Phillips curve shift? 1.) Using the 3-point curved line drawing tool, draw a new Phillips curve that reflects the permanent increase in oil prices. Label your line appropriately. 2.) Using the point drawing tool, indicate where the short-run equilibrium would be as a result of the increase in oil prices. Label your point "A". 3.) Using the point drawing tool, indicate where the new potential output is located. Label your point "Yn".

A shock to aggregate supply will have different outcomes when there are different assumptions about the formation of the level of expected inflation. One path assumes that the level of expected inflation equals lagged inflation. The level of expected inflation changes over time. The second path assumes the level of expected inflation is anchored to a specific value and never changes. Begin in medium-run equilibrium where actual and expected inflation equal 2% in period t. Suppose the economy is at initial equilibrium at point A, as shown in the graph on the right, and there is a permanent increase in the price of oil in period t +1. How does the Phillips curve shift? 1.) Using the 3-point curved line drawing tool, draw a new Phillips curve that reflects the permanent increase in oil prices. Label your line appropriately. 2.) Using the point drawing tool, indicate where the short-run equilibrium would be as a result of the increase in oil prices. Label your point "A". 3.) Using the point drawing tool, indicate where the new potential output is located. Label your point "Yn".

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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