2. The Phillips curve in the short run and long run The following graph plots aggregate demand (AD2027) and aggregate supply (AS) for the imaginary country of Cotopaxi 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. 108 A 107 LRAS AS 106 A 105 Outcome C B 104 PRICE LEVEL AD 2027 103 ADA 102 ADB 101 100 6 8 10 12 14 16 0 2 OUTPUT (Trillions of dollars)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 a contractionary policy, aggregate demand in 2028 will be given by the curve labeled ADp, 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 B or the price level at outcome A. Complete the table by entering the inflation rate at each potential outcome point. Note: Calculate the inflation rate to two decimal points of precision. Unemployment Rate Inflation Rate A 5% % B 7% % 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.)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.) -+ SRPC 6 A LRPC INFLATION RATE (Percent) N 0 2 3 5 6 7 UNEMPLOYMENT RATE (Percent)The short-run Phillips curve is V line: 0 At the natural rate of unemployment O Representing the tradeoff between unemployment and inflation 0 At the natural level of output Now consider the longrun effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate demand curve remains at A03. The longrun equilibrium that would follow such a policy is designated outcome C. Going back to the rst graph, place the grey point (star symbol) at outcome C. Because output at point C is V the natural level of output, the unemployment rate associated with outcome (3 is V the natural rate of unemployment. Finally, use the green llne (triangle symbol) to draw the longrun Phllllps curve (LRPC) on the second graph. This line is V line: D At the natural level of output O Representing the tradeoff between unemployment and inflation 0 At the natural rate of unemployment The short-run Phillips curve is line: At the natural rate o a downward-sloping O Representing the tra a vertical pyment and inflation O At the natural level an upward-slopingGoing 33ch to the rst graph, place the grey point (star symbol) at outcome C. Because output at point C is V the natural level of output, the unemployment rate associated with outcome (3 is v the natu ployment. greater than less than Finally, use the green line (t to draw the longrun Phillips curve (LRPC) on the second graph. equal to This line is 0 At the natural level of output O Representing the tradeol'f between unemployment and inflation O At the natural rate of unemployment Going back to the rst graph, place the grey point ( star symbol) at outcome C. Because output at point C is V the natural level of output, the unemployment rate associated with outcome (3 is the natural rate of unemployment. greater than reen line {triangle symbol) to draw the longrun Phillips curve {LRPC} on the second graph. equal to v line: less than I At the natural level of output 0 Representing the tradeoFf between unemployment and inflation 0 At the natural rate of unemployment Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph. This line is line: O A a downward-sloping utput O R a vertical ff between unemployment and inflation O A an upward-sloping employment5. The Phillips curve in the late 20th century The following table presents historical unemployment and inflation data in the United States for the years 1974 through 1978. Unemployment Rate Inflation Rate Year (Percent) (Percent) 1974 5.6 11.0 1975 8.5 9.1 1976 7.7 5.8 1977 7.1 6.5 1978 6.1 7.6 Plot the data for these five years on the following graph. Note: You will not be graded on how you plot the points, but plotting the points accurately on the graph will help you examine the relationship between unemployment and inflation during this period and solve the problems that follow.Plot the data for these five years on the following graph. Note: You will not be graded on how you plot the points, but plotting the points accurately on the graph will help you examine the relationship between unemployment and inflation during this period and solve the problems that follow. 13 12 Data Points 11 10 INFLATION RATE (Percent) CO 6 A 4 5 6 7 8 9 10 11 2 UNEMPLOYMENT RATE (Percent)which of the following statements most accuratel'iir describes the relationship between ination and unemployment in the United States during this time period? 0 The shortrun Phillips curve remained stable. 0 The shortrun Phillips curve shifted to the left after actual inflation was lower than expected. 0 The shortrun Phillips curve shifted to the right after actual ination was higher than expected. The following graph shows the shortrun Phillips curve (SRPC) for the United States in 19?4. The following graph shows the short-run Phillips curve (SRPC) for the United States in 1974. Shift the curve to illustrate what happened between 1974 and 1978. O SRPC INFLATION RATE SRPC UNEMPLOYMENT RATEThe following graph shows the aggregate demand (AD) and shortrun aggregate supply (AS) curves for the United States in 19?4. Shift the aggregate supply curve to approximate what happened between 1974 and 1 978. ('3 AD A5 PRICE IJEVEL AD OUTPUT