unit 3-5: aggregate demand and supply and fiscal policy 1

Unit 3-5:Aggregate Demand and Supply and Fiscal Policy

1

Inflation

2

SRPC

Short Run Phillips Curve

Unemployment2% 9%

1%

5%

When the economy is overheating, there is low unemployment but high inflation

When there is a recession, unemployment is high but

inflation is low

Inflation

3

SRPC

Short Run Phillips Curve

Unemployment2% 9%

1%

5%

What happens when AS falls causing stagflation?Increase in unemployment and inflation

SRPC1

Inflation

4

Short Run vs. Long Run

Unemployment2% 9%

1%

5%

3%

5%

Long Run Phillips Curve

In the long run there is no tradeoff between inflation and unemployment

The LRPC is vertical at the Natural Rate of

Unemployment

AD/AS and the Phillips Curve

Price Level

6

AD

AS

AD/AS and the Phillips Curve

GDPRQY

PLe

LRAS Inflation

SRPC

UnemploymentUY

LRPC

Show what happens on both graphs if AD increase

AD1

Price Level

7

AD

AS

AD/AS and the Phillips Curve

GDPRQY

PLe

LRAS Inflation

SRPC

UnemploymentUY

LRPC

Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls?

AD1

Price Level

8

AD

AS

AD/AS and the Phillips Curve

GDPRQY

PLe

LRAS Inflation

SRPC

UnemploymentUY

LRPC

Correctly draw the LRPC and SRPC at full employment. What happens when AS falls?

AS1

SRPC1

Price Level

9

AD

AS

AD/AS and the Phillips Curve

GDPRQY

PLe

LRAS Inflation

SRPC

UnemploymentUY

LRPC

Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up?

AS1

SRPC1

Analyzing the Economy Graphically

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The Good, the Bad, and the Ugly

  Unemployment Inflation GDP Growth

Good 6% or less 1%-4% 2.5%-5%

Worry 6.5%-8% 5%-8% 1%-2%

Bad 8.5 % or more 9% or more .5% or less

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