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Part 1 - Draw It - Draw a correctly labeled AS /AD graph and a correctly labeled Phillips curve graph showing an economy with a
Part 1 - Draw It - Draw a correctly labeled AS /AD graph and a correctly labeled Phillips curve graph showing an economy with a recessionary gap . Label the initial equilibrium on both graphs point "A" 1. Suppose that policymakers increase government spending resulting in full employment . Show the result of this fiscal policy action on both graphs . Label this new equilibrium point "B". Identify what happens to inflation and unemployment in the short -run . Suppose that policymakers now cut consumer taxes resulting in a positive output gap . Show the result of this fiscal policy action on both graphs . Label the new equilibrium point "C". Identify what happens to employment in the short -run . Explain 3. Explain why it is likely that price level in the short -run increased faster as the economy moved from point "B" to point "C" compared to moving from point "A" to point "B"? . At point "C", what will happen to wages and resource prices in the long run ? Explain 5. Given your answer to question #4, show how both models adjust in the long -run and label the final equilibrium point "D". Identify what will happen to inflation and unemployment at point "D" compared to when the economy was at point "C". 3. Is the real output at point "D" greater than , less than , or equal to the real output at point "B"? Explain . 7. Explain why the government was unable to keep the unemployment rate below the natural rate of unemployment
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