Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 17.3, Problem 3QQ
To determine
An example of favorable supply shocks in
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Does the Phillips curve have a positive or negative slope? Explain how this slope is derived. When will an increase in aggregate demand not result in lower unemployment rates in the short run?
The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.
Phillips Curve graph, aggregate model(side-by- side)- show the relationship between the Phillips model and the aggregate model if stagflation hits the economy(a supply shock)
Draw a graph
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Brief Principles of Macroeconomics (MindTap Course List)
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- Draw the Phillips curve.Use the model of aggregate demand and aggregate supply to show how policy can move the economy from a point on this curve with high inflation to a point with low inflationarrow_forwardfavourable shock to aggregate supply, use the model of aggregate demand and aggregate supply to explain the effects of such a shock , how does it effect the phillips curve?arrow_forwardExplain the role of expectations in the macroeconomy.arrow_forward
- Graphically derive short run Phillips curve with the help of aggregate demand and supply and demand.arrow_forwardWhat is The Short-Run and Long-Run Phillips Curves?arrow_forwardAs described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. LRAS Aggregate Supply Aggregate Demand XE 0 LRPC SRPC Unemployment Rate Price Level Inflation Rate Quantity of Output Aggregate Demand Equilibrium output will rise. The effect on the inflation rate will be ambiguous. The price level will fall. Unemployment will rise. Aggregate Supply LRAS Long-Run Equilibrium SRPC LRPC Long-Run Equilibrium (?) Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the…arrow_forward
- Suppose the Phillips curve is and the Aggregate Demand curve is Tt = Tt1+3ytot Yt = at 5(πt - 0.02) where at = Ot = 0 in the steady state. (a) Calculate the steady state values of output and inflation in this economy. (b) Calculate the short- and long-run responses of the economy to the following shocks (use a table to report your answers, as well as show them graphically on the AD-AS graph, as well as plot inflation and output against time): (1) A one-time decrease in ot to -0.05. (2) A one-time increase in at to 0.05 (at returns to 0 thereafter). (3) A permanent decrease in the Fed's inflation target from 0.02 to 0.arrow_forwardDuring an election term, the government increases its spending temporarily. Show the effect of this shock on the economy using the IS-MP-PC model. Explain how and why you would change the interest rate in response to this shock. Make sure to draw the IS-MP diagram and Phillips curve.arrow_forwardUnder the assumption of anticipated shocks, can policymakers exploit the Phillips curve relationship in the short-run? In the long run?arrow_forward
- All of the following are likely results of a positive demand shock EXCEPT Select one: higher inflation. the Phillips curve shifts to the right. a positive output gap. the IS curve shifts to the right.arrow_forwardAssume an imaginary country called Narnia. Firms in this country heavily rely on natural gas as a raw material to produce the final output. Assume a sudden fall in the price of natural gas. This shock is an event that directly affects firms' costs of production and thus the price that they charge. Describe the effects of this shock on the aggregate supply curve and on the Phillips curve of the economy of Narnia. Use a diagrammatic analysis to provide your answer.arrow_forwarddefine adaptive expectations what is its main implicationarrow_forward
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