1. 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. 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

3. 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.

4. Unit 3: Aggregate Demand and Supply and Fiscal Policy4

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

6. 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

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

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

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

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

11. AD/AS and the Phillips Curve

12. 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

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

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

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

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

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

18. AS1 SRAS LRPC LRAS Price Level Inflation AS2 PLe SRPC1 AD SRPC2 SRPCQY
GDPR UY
Unemployment 19

19. AS AS2 LRPC LRAS Price Level Inflation PLe SRPC1 AD2 AD SRPC QY GDPRUY
Unemployment 20

20. Analyzing the Economy Graphically21

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

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