unit 3: aggregate demand and supply and fiscal policy
DESCRIPTION
Unit 3: Aggregate Demand and Supply and Fiscal Policy. 1. The Phillips Curve. Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increase?. In general, there is an inverse relationship between unemployment and inflation. 3. - PowerPoint PPT PresentationTRANSCRIPT
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Shows tradeoff between inflation and unemployment.
What happens to inflation and unemployment when AD increase?
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In general, there is an inverse relationship between unemployment and inflation
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Inflation
4
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
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Inflation
5
SRPC
Short Run Phillips Curve
Unemployment2% 9%
1%
5%
What happens when AS falls causing stagflation?Increase in unemployment and inflation
SRPC1
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Inflation
6
SRPC
Short Run vs. Long Run
Unemployment2% 9%
1%
5%
What happens when AD increases?
SRPC1
3%
5%
Long Run Phillips CurveIn the long run, wages
and resource prices increase. AS falls.
SRPC shifts right.
What happens in the long run?
![Page 7: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/7.jpg)
Inflation
7
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
![Page 8: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/8.jpg)
Inflation
8
SRPC
Short Run vs. Long Run
Unemployment2% 9%
1%
5%
What happens when AD falls?
SRPC1
3%
5%
Long Run Phillips Curve
In the long run wages fall and there is no tradeoff between
inflation and unemployment
What happens in the long run?
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Price Level
10
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
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Price Level
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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
![Page 12: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/12.jpg)
Price Level
12
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
![Page 13: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/13.jpg)
Price Level
13
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
![Page 14: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/14.jpg)
Price Level
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SRAS
GDPRQY
LRAS Inflation
SRPC
UnemploymentUY
LRPC
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AD
Price Level
15
SRAS
GDPRQY
LRAS Inflation
SRPC
UnemploymentUY
LRPC
AD2
AD3
PLe
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AD
Price Level
16
SRAS
GDPRQY
LRAS Inflation
SRPC
UnemploymentUY
LRPCAS1
PLe
AS2
SRPC1
SRPC2
![Page 17: Unit 3: Aggregate Demand and Supply and Fiscal Policy](https://reader036.vdocuments.us/reader036/viewer/2022062411/56814c49550346895db950e0/html5/thumbnails/17.jpg)
AD
Price Level
17
AS
GDPRQY
LRAS Inflation
SRPC
UnemploymentUY
LRPCAS2
PLe
SRPC1AD2
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1. PPC2. Business Cycle3. AD/AS4. Phillips Curve
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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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