Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 5%, and potential output is $40 trillion. Use the orange points (square symbols) to draw the aggregate supply curve in this case, and use the black point (X symbol) to mark the equilibrium price level and real GDP. PRICE LEVEL 180 160 140 120 100 80 0 20 40 60 REAL GDP (Trillions of Dollars) 80 AD 100 Aggregate Supply Equilibrium ? On the following graph, use the purple points (diamond symbols) to draw the short-run Phillips curve for this economy when inflation is perfectly

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Chapter1: Making Economics Decisions
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Economics

 

Options for the first 3 blanks (increase, derease, no change,)

Option for last: rational expectations theory, monetarism, keynesian theory

Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and
wages rise at the same rate, which implies that the real wage stays constant.
The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is
5%, and potential output is $40 trillion.
Use the orange points (square symbols) to draw the aggregate supply curve in this case, and use the black point (X symbol) to mark the equilibrium
price level and real GDP.
PRICE LEVEL
180
160
140
120
100
80
0
20
40
60
REAL GDP (Trillions of Dollars)
80
AD
100
Aggregate Supply
Equilibrium
?
On the following graph, use the purple points (diamond symbols) to draw the short-run Phillips curve for this economy when inflation is perfectly
forecasted.
Transcribed Image Text:Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 5%, and potential output is $40 trillion. Use the orange points (square symbols) to draw the aggregate supply curve in this case, and use the black point (X symbol) to mark the equilibrium price level and real GDP. PRICE LEVEL 180 160 140 120 100 80 0 20 40 60 REAL GDP (Trillions of Dollars) 80 AD 100 Aggregate Supply Equilibrium ? On the following graph, use the purple points (diamond symbols) to draw the short-run Phillips curve for this economy when inflation is perfectly forecasted.
On the following graph, use the purple points (diamond symbols) to draw the short-run Phillips curve for this economy when inflation is perfectly
forecasted.
INFLATION RATE (Percent)
10
8
0
0
2
4
6
UNEMPLOYMENT RATE (Percent)
8
10
Short run Phillips curve
(?)
Now suppose the Federal Reserve increases the money supply. Assume that an increase in the equilibrium price level translates into a higher level of
inflation, and a decrease in the price level translates into a lower level of inflation. The effect of the Fed's policy is
in the inflation.
rate,
in the unemployment rate, and
▼in real GDP.
The school of economic thought most closely associated with this analysis is
Transcribed Image Text:On the following graph, use the purple points (diamond symbols) to draw the short-run Phillips curve for this economy when inflation is perfectly forecasted. INFLATION RATE (Percent) 10 8 0 0 2 4 6 UNEMPLOYMENT RATE (Percent) 8 10 Short run Phillips curve (?) Now suppose the Federal Reserve increases the money supply. Assume that an increase in the equilibrium price level translates into a higher level of inflation, and a decrease in the price level translates into a lower level of inflation. The effect of the Fed's policy is in the inflation. rate, in the unemployment rate, and ▼in real GDP. The school of economic thought most closely associated with this analysis is
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