Question

 1. Aggregate demand, aggregate supply, and the Phillips curve

 In the year 2020, aggregate demand and aggregate supply in the fictional country of Drooble are represented by the curves AD₂₀₂₀ and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 2021. The first potential aggregate-demand curve is given by the AD_A curve, resulting in the outcome illustrated by point A. The second potential aggregate-demand curve is given by the AD_B curve, resulting in the outcome illustrated by point B.

 Suppose the unemployment rate is 7% under one of these two outcomes and 5% under the other. Based on the previous graph, you would expect _______  to be associated with the lower unemployment rate (5%).

 If aggregate demand is high in 2021, and the economy is at outcome B, the inflation rate between 2020 and 2021 is _______ .

 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 Philips curve for this economy In 2021.

 Hint: Click on each point after you plot it to make sure you have placed it on the exact coordinate you Intended.

 Suppose thet the government is considering enacting an expensionary policy in 2020 that would shift aggregate demand in 2021 from AD_A to AD_B.

 This would cause a _______  the short-run Phillps curve, resulting in_______  in the infation rate and_______  in the unemployment rate.

Options for the blanks:

Blank 1: outcome A, outcome B

Blank 2: 2.94, 1.96, 5.00, 4.00

Blank 3: shift of, movement along

Blank 4: decrease, increase

Blank 5: increase, decrease

Answer 1

Correct Answer:

1.Outcome B

2.2.94%

Working note:

Lower output will reflect higher unemployment at A and higher output will show the lower unemployment level at point B.

Inflation rate between 2020 & 2021 = (105-102)/102 = 2.94%

Correct Answer:

1. Movement along
2. An increase
3. A decrease

In the short run, with increase in money supply, the movement will be in upward direction along the short run phillips curve so that unemployment comes down and inflation rate increases.