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.

Answer 2

Suppose the unemployment rate is 7% and 5% respectively for the two outcomes. Based on the Phillips curve, we know that inflation rate is inversely related to the unemployment rate. Based on the graph, it is expected that outcome B is related to unemployment at 5%.

If aggregate demand is high in 2021 and outcome is at B the price level changes from 2020 to 2021; 102 to 105 implies the rate of inflation is 2.94%

Suppose that the government is considering enacting an expansionary policy in 2020 that would shift aggregate demand in 2021, This would cause a movement along the short-run Phillips curve resulting in an increase in inflation rate and a decrease in unemployment rate.

Answer 3

Solution

1. I would expect the outcome B to be associated with a lower unemployment rate (5%)

2.Inflation rate between 2020 and 2021 is 1.96%

Inflation is a measure of price rise so ((105-104) /(104) ) * 100 which is 0.96%.So if it's value is 1 initially it will be 1.96 now.

3.movement along the short-run phillips curve

4.Increase in inflation rate - As aggregate demand increases,the prices also increases.

5.Decrease in unemployment rate - As aggregate demand increases,the production will haveto increase which requires more people to be hired which leads to decrease in unemployment rate.

Answer 4

1. Outcome A = Producing less output requires hiring fewer workers. Since less output is produced at outcome A than at outcome B, unemployment is almost certainly higher if the economy is at outcome A.

1.96 = 

1. Suppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADA" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">ADA${\mathit{AD}}_{\mathrm{A}}$ to ADB" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">ADB${\mathit{AD}}_{\mathrm{B}}$. This would cause amovement along   the short-run Phillips curve, resulting inan increase   in the inflation rate anda decrease   in the unemployment rate.
   

Answer 5

1. Outcome A = Producing less output requires hiring fewer workers. Since less output is produced at outcome A than at outcome B, unemployment is almost certainly higher if the economy is at outcome A.

1.96 = 

1. Suppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADA" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">ADA${\mathit{AD}}_{\mathrm{A}}$ to ADB" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">ADB${\mathit{AD}}_{\mathrm{B}}$. This would cause amovement along   the short-run Phillips curve, resulting inan increase   in the inflation rate anda decrease   in the unemployment rate.