Question

Consider the aggregate economy for the United States in 2007 and 2008, represented by the graph below. In which year is the unemployment rate higher? Price level (GDP deflator, 2009 = 100) LRAS2007 SRAS2008 LRAS2008 SRA $2007 99.2 A 97.3 AD2007 AD2008 14.83 14.84 14.88 15.20 Real GDP (trillions of 2009 dollars) The unemployment rate is higher in 2007. The unemployment rate is equal in the two years. The unemployment rate is higher in 2008. It cannot be determined from the graph the year in which the unemployment rate is higher.

Answer 1

8. The Phillips Curve establishes a negative relation between inflation and unemployment. The inflation and unemployment changes with supply shock and demand shock. The positive supply shock is the sudden increase in aggregate supply which results in lower price and increased unemployment. The reason is that as the price falls the producers reduce the volume of output and unemployment increase. A negative supply shock is a sudden fall in aggregate supply which increases the price level and reduce unemployment rate. While price increase the producers increase the level of output which reduce unemployment. Similarly positive demand shock is sudden increase in aggregate demand which cause increase in price level and smaller unemployment rate. On the other, the negative demand shock is sudden decrease in aggregate demand which result in decrcased price level and increased unemployment. Thus according to A.W Phillip there is an invcrse lation betwcen inflation and unemployment ratc In the figure given there is a positive demand shock and negative supply shock in 2008, both contributes price level to increase to 99.2 and unemployment to fall. In 2007 the price level is lower which cause increased unemployment Answcr: The uncmployment ratc is highcr in 2007 Real GDP in To find the Real GDP growth, the formula is Real GDP in year 2 year 1/Real GDP in year x 100. Therefore Rcal GDP growth =19.3-16.8/16.8x100-14.88 Answer 14,88 9. The longrun aggregate supply curve represents potential level of GDP (output equal to maximum productive capacity). The LRAS curve shift to the right when there is an improvement in potential capacity. In the year 2007 the potential GDP was 4.84, in 2008 it increased to 15.20, then the potential capacity increased by 0.36 The growth rac Potential GDP in 2008- Potential GDP in 2007/Polcntal GDP in 2007x 100 15-20-14.84/14.84x100 2.42 Growth rate in potential GDP 2. 42 10. MPC is change in consumption change in income (AC/AY) The dotted lnc rcprescnts the aggrcgatc cxpenditurec and the 45° linc is the aggregate income The change in consumption from breakeven is 14.5-11= 3.5 The change in income is 15-11= 4 Therefore MPC 3.5/4-0.875