Monday, October 16th Good morning! Reminders Please get out your notes  Be sure to update your planner/calendar with the new Unit III Test Dates… Bring headphones for tomorrow! Print the “Morton’s Phillips Curve Packet” for tomorrow. Permission Slip is due tomorrow…. Outside Work Part II is due tomorrow…. Have you been reading? Be sure to take time and enrich your understanding before the test…….

List the arguments of Keynes and Hayek while you’ll listen 

2006B Practice FRQ Assume the country’s economy is operating at less than full employment. Draw a correctly labeled graph of AD/AS, and show each of the following: Long Run Aggregate Supply Curve Current output and price level. b. Assume that policy makers take no policy action and that prices and wages are flexible. Explain what will happen to each of the following: a. Short Run Aggregate Supply b. Employment 3 Copyright ACDC Leadership 2015

2006B Practice FRQ 4 Copyright ACDC Leadership 2015

Unit 3: Aggregate Demand and Supply and Fiscal Policy 5 Copyright ACDC Leadership 2015

The Phillips Curve Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increase? Copyright ACDC Leadership 2015

In general, there is an inverse relationship between unemployment and inflation 7 Copyright ACDC Leadership 2015

Short Run Phillips Curve When the economy is overheating, there is low unemployment but high inflation Inflation When there is a recession, unemployment is high but inflation is low 5% Short Run -AD Falls, PL and Q fall Long Run- AS Increases as workers accept lower wages and production costs fall. PL goes down, Q goes back to Full Employment 1% SRPC 2% 9% Unemployment 8 Copyright ACDC Leadership 2015

Short Run Phillips Curve What happens when AS falls causing stagflation? Increase in unemployment and inflation Inflation 5% Short Run -AD Falls, PL and Q fall Long Run- AS Increases as workers accept lower wages and production costs fall. PL goes down, Q goes back to Full Employment SRPC1 1% SRPC 2% 9% Unemployment 9 Copyright ACDC Leadership 2015

Short Run vs. Long Run Long Run Phillips Curve In the long run there is no tradeoff between inflation and unemployment Long Run Phillips Curve Inflation 5% The LRPC is vertical at the Natural Rate of Unemployment 3% Short Run -AD Falls, PL and Q fall Long Run- AS Increases as workers accept lower wages and production costs fall. PL goes down, Q goes back to Full Employment 1% 2% 5% 9% Unemployment 10 Copyright ACDC Leadership 2015

The Phillips Curve in real life isn’t like the textbook

AD/AS and the Phillips Curve Copyright ACDC Leadership 2015

AD/AS and the Phillips Curve Show what happens on both graphs if AD increase LRPC Price Level LRAS Inflation AS PLe AD1 AD SRPC QY GDPR UY Unemployment 13 Copyright ACDC Leadership 2015

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls? Price Level LRAS LRPC Inflation AS PLe AD SRPC AD1 QY GDPR UY Unemployment 14 Copyright ACDC Leadership 2015

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC at full employment. What happens when AS falls? Price Level LRAS LRPC Inflation AS1 AS PLe SRPC1 AD SRPC QY GDPR UY Unemployment 15 Copyright ACDC Leadership 2015

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up? Price Level LRAS LRPC Inflation AS AS1 PLe SRPC AD SRPC1 QY GDPR UY Unemployment 16 Copyright ACDC Leadership 2015

SRAS LRPC LRAS Price Level Inflation SRPC QY GDPR UY Unemployment 17 Copyright ACDC Leadership 2015

SRAS LRPC LRAS Price Level Inflation PLe AD2 AD SRPC AD3 QY GDPR UY Unemployment 18 Copyright ACDC Leadership 2015

AS1 SRAS LRPC LRAS Price Level Inflation AS2 PLe SRPC1 AD SRPC2 SRPC QY GDPR UY Unemployment 19 Copyright ACDC Leadership 2015

AS AS2 LRPC LRAS Price Level Inflation PLe SRPC1 AD2 AD SRPC QY GDPR UY Unemployment 20 Copyright ACDC Leadership 2015

2008 Audit Exam A

Assume that the United States Economy is currently in recession in a short-run equilibrium. Draw a correctly labeled graph of the short-run and long run Phillips curves. Use the letter A to label a point that could represent the current state of the economy in recession. Draw a correctly labeled graph of AD/AS in a recession and show each of the following. The long-run equilibrium output, labeled Yf The current equilibrium output and price levels labeled Ye and Ple, respectively. To balance the federal budget, suppose that the government decides to raise income taxes while maintaining the current level of government spending. On the graph in part (b), show the effect of the increase in taxes. Label the new equilibrium output and price levels Y2 and PL2, respectively. Copyright ACDC Leadership 2015

Analyzing the Economy Graphically 23 Copyright ACDC Leadership 2015

PPC Business Cycle AD/AS Phillips Curve Use the following models to show full employment, a recessionary gap, and an inflationary gap. PPC Business Cycle AD/AS Phillips Curve Copyright ACDC Leadership 2015

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 25 Copyright ACDC Leadership 2015