A. Draw a correctly labeled graph of the short run Phillips Curve for Country Y. Show the actual unemployment and inflation rate for both years. Label the Phillips Curve as SRPC. B. Now, the short run aggregate supply curve has shifted left. i. Identify one cause that would shift short run aggregate supply to the left. ii. On your graph in Part A, show how this shift would impact the short run Phillips Curve.

1. Aggregate demand, aggregate supply, and the Phillips curve In the year 2020, aggregate demand and aggregate supply in the fictional country of Bartak are represented by the curves AD2020 and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 2021. The first potential aggregate demand curve is given by the ADA curve, resulting in the outcome illustrated by point A. The second potential aggregate demand curve is given by the ADB curve, resulting in the outcome illustrated by point B. PRICE LEVEL 108 107 106 105 104 103 102 + 101- AS ADB AD2020 ADA 100 + 0 2 4 6 8 10 12 14 16 OUTPUT (Trillions of dollars) Suppose the unemployment rate is 6% under one of these two outcomes and 3% under the other. Based on the previous graph, you would expect to be associated with the lower unemployment rate (3%). If aggregate demand is high in 2021, and the economy is at outcome B, the inflation rate between 2020 and 2021 is Based on your answers to the…

4. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the short-run (SR) Phillips curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 8 5 3 N 1 0 0 3 9 SR Phillips Curve 8 12 UNEMPLOYMENT RATE (Percent) 15 18 In the short run, an unexpected decrease in the money supply results in unemployment rate. SR Phillips Curve in the inflation rate and in the

The following graphs plot the long-run equilibrium situation for an economy. The first graph plots the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second graph plots the long-run and short-run Phillips curves (LRPC and SRPC, respectively). PRICE LEVEL O LRAS 2 3 OUTPUT (Trilions of dollars) AD AD 10 LRAS