Question

In the year 2023, aggregate demand and aggregate supply in the fictional country of Gurder are represented by the curves AD2023${\mathit{AD}}_{2023}$ and AS on the following graph.

Suppose the natural rate of output in this economy is $6 trillion.

On the following graph, use the green line (triangle symbol) to plot the long-run aggregate-supply (LRAS) curve for this economy.

Economists have forecast that if the government does nothing and the economy continues to grow at the current rate, aggregate demand in 2024 will be given by the ADA${\mathit{AD}}_{\mathit{A}}$ curve, resulting in the outcome illustrated by point A. If the government pursues an expansionary policy, aggregate demand in 2024 will be given by the ADB${\mathit{AD}}_{\mathit{B}}$ curve, resulting in the outcome illustrated by point B.

The following table gives projections for the unemployment rates that would occur at point A and point B. Consider what the rate of inflation would be between 2023 and 2024, depending on whether the economy moves from the initial price level of 102 to the price level at outcome A or the price level at outcome B.

Complete the table by entering the inflation rate at each potential outcome point.

Note: Calculate the inflation rate to two decimal points of precision.

	Unemployment Rate	Inflation Rate
A	7%
B	5%

Based on your answers to the previous questions, use the black line (plus symbol) to draw the short-run Phillips curve (SRPC) for this economy in 2024.

The short-run Phillips curve is   (vertical/upward sloping/downward sloping) line:

Representing the tradeoff between unemployment and inflation

At the natural rate of output

At the natural rate of unemployment

Now consider the long-run effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate-demand curve remains at ADB${\mathit{AD}}_{\mathit{B}}$. Designate the long-run equilibrium that would follow such a policy as outcome C.

Going back to the first graph, place the grey point (star symbol) at outcome C.

Because output at point C is   (less/equal/greater) the natural rate of output, the unemployment rate associated with outcome C is   (less/equal/greater) the natural rate of unemployment.

Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph.

This line is   (upward/vertical/downward sloping) line:

At the natural rate of output

At the natural rate of unemployment

Representing the tradeoff between unemployment and inflation