Question 1

1. Aggregate demand, aggregate supply, and the Phillips curve In the year 2027, aggregate demand and aggregate supply in the imaginary country of Patagonia are represented by the curves Alsgz7 and AS on the following graph. The price level is currently 102. The graph also shows two potential cutcomes for 2028. The first possible aggregate demand curve is given by the curve labeled AD curve, resulting in the outcome given by point A. The second possible aggregate demand curve is given by the curve labeled ADR, resulting in the outcome given by point B. @ 108 T FRICE LEVEL OUTPUT (Trillions of dollars) Suppose the unemploymeant rate is 7% under one of these two cutcomes and 5% under the other Based on the previous graph, you would expect W to be associated with the lower unemployment rate (5%). If aggregate demand is low in 2028, and the economy is at outcome A, the inflation rate between 2027 and 2028 is b Based on your answers to the previous questions, on the following graph use the purple point (diamond symbol) to plot the unemployment rate and inflation rate if the economy is at point A. Next, use the green point (triangle symbol) to plot the unemployment rate and inflation rate if the economy is at point B. (As you place these points, dashed drop lines will automatically extend to both axes.) Finally, use the black line (cross symbol) to draw the short-run Phillips curve for this economy in 2028. Note: For graphing pruposes, round the inflation rate under each outcome to the nearest whole percent. For example, round 1.9% to 2.0%. Hint: Hover your cursor over each point after you plot it to make sure you have placed it on the exact coordinate you intended. Outcome A Outcome B + INFLATION RATE (Percent) Phillips Curve 5 UNEMPLOYMENT RATE (Percent) Suppose that the government is considering enacting an expansionary policy in 2027 that would shift aggregate demand in 2028 from AD, to ADB. This would cause a the short-run Phillips curve, resulting in in the inflation rate and in the unemployment rate. Grade It Now Save & Continue2. The Phillips curve in the short run and long run The following graph plots aggregate demand (A7) and aggregate supply (AS) for the imaginary country of Iquazu 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. @ 108 107 106 Outcome C 104 PRICE LEVEL 103 102 101 100 o 2 4 & 8 10 i2 14 18 DUTPUT (Trilions of dollars) Economists foracast 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 A4, resulting in the outcome given by point A. If. howewver, the government pursues a contractionary policy, aggregate demand in 2028 will be given by the curve labeled ADg. 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 betwean 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 putcome 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 3% 6% 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 A LRPC INFLATION RATE (Percent) 2 5 UNEMPLOYMENT RATE (Percent)The short-run Phillips curve is 7 line: O At the natural level of output O At the natural rate of unemployment O Representing the tradeoff between unemployment and inflation Now consider the long-run effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate demand curve remains at ADB. The long-run equilibrium that would follow such a policy is designated outcome C. Going back to the first graph, place the grey point (star symbol) at outcome C. Because output at point C is the natural level of output, the unemployment rate associated with outcome C is 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: At the natural rate of unemployment O Representing the tradeoff between unemployment and inflation At the natural level of output Grade It Now Save & Continue