2. The government increases spending on the war in Iraq. A. Increase in AD C. Increase in AS B. Decrease in AD D. Decrease in AS 1. The effect on businesses when Hurricane Katrina destroyed oil refineries causing an increase in oil prices. 2. The government increases spending on the war in Iraq. 3. The effect on investment when the government decreases the money supply causing interest rates to double. 4. Consumer confidence falls as many consumers fear a recession. 5. The result on consumer spending when the government increases taxes for Universal Health Care 6. Mexico, a major importer of U.S. goods, has a depression. 7. Advances in education makes the workforce more productive 8. Prices of imported lumber from Canada fall significantly.

2. The government increases spending on the war in Iraq. A A. Increase in AD C. Increase in AS B. Decrease in AD D. Decrease in AS 1. The effect on businesses when Hurricane Katrina destroyed oil refineries causing an increase in oil prices. D 2. The government increases spending on the war in Iraq. A 3. The effect on investment when the government decreases the money supply causing interest rates to double. B 4. Consumer confidence falls as many consumers fear a recession. B 5. The result on consumer spending when the government increases taxes for Universal Health Care. B 6. Mexico, a major importer of U.S. goods, has a depression. B 7. Advances in education makes the workforce more productive C 8. Prices of imported lumber from Canada fall significantly. C

Review Draw an Inflationary Gap on your desk. Draw a Recessionary Gap on your desk. Why do classical economists advocate for no gov’t involvement in the economy? Why do Keynesian economists say that the government must get involved in the economy? Label the 3 stages of the Aggregate Supply curve. Name 10 colleges/universities in Georgia.

Unit 3: Aggregate Demand and Supply and Fiscal Policy 4

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

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 7

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 8

Short Run vs. Long Run What happens when AD increases? What happens in the long run? Long Run Phillips Curve Inflation In the long run, wages and resource prices increase. AS falls. SRPC shifts right. 5% 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 SRPC1 1% SRPC 2% 5% 9% Unemployment 9

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

What happens when AD falls? What happens in the long run? Short Run vs. Long Run What happens when AD falls? What happens in the long run? Long Run Phillips Curve Inflation 5% In the long run wages fall and there is no tradeoff between inflation and 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% SRPC SRPC1 2% 5% 9% Unemployment 11

AD/AS and the Phillips Curve

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

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

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

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

SRAS LRPC LRAS Price Level Inflation SRPC QY GDPR UY Unemployment 17

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

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

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

Analyzing the Economy Graphically 21

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 22

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 23