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Unit 3: Aggregate Demand and Supply and Fiscal Policy
1 Copyright ACDC Leadership 2015
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The Phillips Curve 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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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 4
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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 5
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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 6
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The Phillips Curve in real life isn’t like the textbook
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AD/AS and the Phillips Curve
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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 9
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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 10
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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 11
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AD/AS and the Phillips Curve
Correctly draw the LRPC and SRPC with a recessionary gap. What happens when AS goes up? Price Level LRAS LRPC Inflation AS AS1 PLe SRPC AD SRPC1 QY GDPR UY Unemployment 12
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SRAS LRPC LRAS Price Level Inflation SRPC QY GDPR UY Unemployment
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SRAS LRPC LRAS Price Level Inflation PLe AD2 AD SRPC AD3 QY GDPR UY Unemployment
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AS1 SRAS LRPC LRAS Price Level Inflation AS2 PLe SRPC1 AD SRPC2 SRPC QY GDPR UY Unemployment
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Long-Run impacts of an AD Increase
LRPC LRAS Price Level Inflation PLe SRPC1 AD2 AD SRPC QY GDPR UY Unemployment
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2008 Audit Exam A
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Analyzing the Economy Graphically
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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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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 21
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