1. 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…….

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

3. 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
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4. 2006B Practice FRQ 4
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5. Unit 3: Aggregate Demand and Supply and Fiscal Policy5
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6. The Phillips Curve Shows tradeoff between inflation and unemployment.
What happens to inflation and unemployment when AD increase?
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7. In general, there is an inverse relationship between unemployment and inflation7
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8. 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
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9. 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
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10. 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
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11. The Phillips Curve in real life isn’t like the textbook

12. AD/AS and the Phillips Curve
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13. 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
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14. 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
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15. 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
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16. 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
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17. SRAS LRPC LRAS Price Level Inflation SRPC QY GDPR UY Unemployment 17
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18. SRAS LRPC LRAS Price Level Inflation PLe AD2 AD SRPC AD3 QY GDPR UY
Unemployment 18
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19. AS1 SRAS LRPC LRAS Price Level Inflation AS2 PLe SRPC1 AD SRPC2 SRPCQY
GDPR UY
Unemployment 19
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20. AS AS2 LRPC LRAS Price Level Inflation PLe SRPC1 AD2 AD SRPC QY GDPRUY
Unemployment 20
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21. 2008 Audit Exam A

22. 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.
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23. Analyzing the Economy Graphically23
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24. 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
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25. 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
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