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Q5. a. What is Phillips curve? Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different. [2 marks] b. Suppose

Q5. a. What is Phillips curve? Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different. [2 marks]

b. Suppose the economy is in a long-run equilibrium. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the RBI undertakes expansionary/contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? (b) What is sacrifice ratio? [5 marks]

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