2. The Phillips curve in the short run and long run Suppose that in the year 202

Question

2. The Phillips curve in the short run and long run Suppose that in the year 2020, the price level in the fictional country of Gurder is 100, and the government is considering whether or not to pursue an expansionary monetary policy. The following graph shows the possible impact of that policy in 2021. If the government does not pursue the policy, aggregate demand will be given by the AD1 curve, resulting in the outcome illustrated by point A. If the government does pursue the policy, aggregate demand will be given by the AD2 curve. In the short run, this policy will result in the outcome illustrated by point B Suppose that potential GDP in this economy is $8 trillion. On the following graph, use the green line (triangle symbols) to plot the potential output curve for this economy PRICE LEVEL 108 PGDP 107 106 Outcome C AS 105 104 103 102XA AD AD 100 0 246 8 10 12 14 16 REAL GDP (Trillions of dollars Help Clear All Suppose that if the economy is operating at point A, the unemployment rate is 6%, and if the economy is operating at point B, the unemployment rate is 3%. Given this information, the natural rate of unemployment in this economy is Based on your answers to the previous questions, use the orange point (square symbol) on the following graph to plot the unemployment rate and inflation rate if the economy is at point A. Next, use the blue point (circle symbol) to plot the unemployment rate and inflation rate if the economy is at point B. Finally, use the red line (cross symbols) to draw the short-run Phillips curve for this economy in 2021. This line is line Representing the tradeoff between unemployment and inflation O At potential GDP At the natural rate of unemployment

Explanation / Answer

i natural rate of unemployment is 3%

ii representing tradeoff between inflation and unemployment.

iii no full information being provided.

iv at natural rate of unemployment.

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