Answered: Suppose that a fall in consumer…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4: Suppose that a fall in consumer spending causes a recession.
a) Illustrate the immediate change 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?

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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