Question

Q1. Phillip's Curve and AD-AS Model: Use assumptions below to set up an initial point denoted as the point A for a, b and c. For each of the following draw an AD/AS diagram and a corresponding Phillip's curve assuming the following: (1) Suppliers produce more goods and services when price increases (2) Actual GDP is 10,000_(3) Full employment GDP is 25,000 (4) The natural rate of unemployment is 5% and Actual unemployment is 10% (5) Discretionary policies are needed because wages are sticky (6) Actual unemployment and output fluctuate around 5% and 25,000 respectively a. Show in both diagrams the effects of a decrease in income tax on price level, output, unemployment and inflation. (Hint: Fiscal Policy) b. Show in both diagrams the effects of decreasing federal fund rate on price level, output, unemployment and inflation. (Hint: Monetary Policy) c. Show in both diagrams the effect of the oil price shocks of the 1970s. (Oil Prices increase).

Answer 1

C essential production. © we know oil น very input for any Therefore increased in oil price will increase the cost of the production. Increase in cost of the production will shift the aggregate supply curore to the left. price leve will be increased but output will be decrease. Economy will move to recession when unemployment rate will be increased due to the increase in price, devel. and short non phillips Curve that to word , the night Price level Inflation Rate 4RAS ARPE = Tosi . iz P SRPC.. SRPE, 100025roo ODP 54. 101, unemployment nate