4-) Suppose we have an economy which is in a long-run equilibrium. a) Graph this economy...

4-) Suppose we have an economy which is in a long-run equilibrium.

a) Graph this economy using long-run and short-run Phillips curves.

b) Now suppose the aggregate demand decreased as the government spending is reduced. Show what happens to the economy on a Phillips curve graph. Where is the economy’s current position on the graph now? Is it possible to return to the original position (with the initial inflation and unemployment levels) through monetary policy? Explain.

c) Now, you should consider an alternative case. Starting from the initial long-run position of the economy, suppose the oil prices increased. Show the new position of the economy on a Philips curve graph. Is it possible to return to the original position this time (with the initial inflation and unemployment levels) through monetary policy? Explain.

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Rahul Sunny answered 1 year ago

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