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Question 14. The Short Run Aggregate Supply and the Phillips Curve                               “Between 1987 and.

Question 14. The Short Run Aggregate Supply and the Phillips Curve                              

“Between 1987 and 1992, the New Zealand economy witnessed a swift drop in the inflation rate by more than 15 percentage points while the unemployment rate increased from about 4 per cent to more than 11 per cent. Subsequent years witnessed a rapid decline of the unemployment rate to its natural rate of 4 per cent with no significant changes in the inflation rate, contrary to the conventional wisdom popularised by the original Phillips curve.”

Apply the general macroeconomic model of aggregate demand (AD) and short run aggregate supply (SRAS) with the expectation-augmented Phillips curve to provide a unified theoretical explanation of those TWO observations concerning the (a) RISE and (b) DECLINE of unemployment. You may refer to hypothetical scenarios or to the actual historical context when considering the plausibility of the above explanation. (Word Limit = 300)

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Rahul Sunny answered 2 years ago
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