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Q1. (20 points) Phillip's Curve and AD-AS Model: Use assumptions below to set up an initial point denoted as the point 1 for a, b,

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Q1. (20 points) Phillip's Curve and AD-AS Model: Use assumptions below to set up an initial point denoted as the point \"1\" for a, b, , and d. For each of the following draw an AD/AS diagram and a corresponding Phillip's curve assuming the following: (1) Actual GDP is 25,000 (2) Full employment GDP is 20,000 (3) The natural rate of unemployment is 5% and Actual unemployment is 3.5% (4) Discretionary policies are needed because wages are sticky (5) Actual unemployment and output fluctuate around 5% and 20,000 respectively Based on the Rational Expectations: Keynesian economists thought of the Phillips curve as a \"trade-off.\" They thought policy makers had the ability to pick low unemployment and high inflation or high unemployment with low inflation, or combination in between and that the economy would stay in whatever position they chose. Explain why this view was mistaken based upon the following events. a. Show in both diagrams the effects of increasing in federal fund rate on price level, output, unemployment and inflation. (Friedman and the Natural Rate Theory) b. Show in both diagrams the effects of cutting government expenditure on infrastructure. c. Show in both diagrams the effects of an increase in expected wage rate. d. Show in both diagrams the effect of a credible announced inflation reduction

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