Suppose the economy starts at point 1 in the aggregate supply–aggregate demand (AS-AD) graph and at...

Suppose the economy starts at point 1 in the aggregate supply–aggregate demand (AS-AD) graph and at point A on the Phillips curve graph. Points 2 and 3 start out stacked on point 1, but they will need to be moved to the proper locations that reflect steps 2 and 3 described below. Likewise for points B and C.

The AS-AD graph reflects two aggregate demand curves (AD1 and AD2), the long-run aggregate supply curve (LAS) and two short-run aggregate supply curves (SAS1 and SAS 2). The Phillips curve graph reflects the long-run Phillips curve (LRPC) and the short-run Phillips curve (SRPC).

The central bank decides to lower the unemployment rate below the natural rate by decreasing the interest rate. Place point 2 on the AS–AD graph and point B on the Phillips curve graph to describe the short‑run macroeconomic equilibrium that results. Likewise, place points 3 and C to describe the long‑run full‑employment equilibrium.

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Rahul Sunny answered 1 year ago

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