Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. An economy is currently in a recession. (a) Draw a single correctly labeled graph with both the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X.
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. An economy is currently in a recession. (a) Draw a single correctly labeled graph with both the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Include correctly labeled diagrams, if useful or required, in explaining your answers.
A correctly labeled diagram must have all axes and curves clearly labeled and must
show directional changes. If the question prompts you to "Calculate," you must
show how you arrived at your final answer.
An economy is currently in a recession.
(a) Draw a single correctly labeled graph with both the short-run and long-run
Phillips curves. Label the current short-run equilibrium as point X.
(b) Is the expected inflation rate greater than, less than, or equal to the actual
inflation rate?
(c) Will borrowers on fixed-rate loans benefit from the situation that you identified in
part (b)? Explain.
(d) Assume the government budget is balanced. In the absence of any
discretionary policy action, will the government budget move into surplus, deficit, or
remain in balance? Explain.
(e) On your graph in part (a), show how the economy will adjust in the long run in
the absence of any discretionary policy action.
(f) Now assume instead the government increases spending without changing
taxes to close the recessionary gap. What effect will this policy have on the
national debt?
(g) Draw a correctly labeled graph of the loanable funds market and show the
effect of the change in the national debt on the equilibrium real interest rate.
(h) Based on the change in the equilibrium real interest rate identified in part (g),
what will happen to economic growth in the country in the long run? Explain.
Expert Solution
Introduction
The Phillips curve, which says that inflation and unemployment have a stable and inverse relationship, was created by A. W. Phillips. Economic expansion, according to the hypothesis, leads to inflation, which leads to more jobs and decreased unemployment.
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