Q4. (15 points) Use assumptions below set up an initial point, and
answer part a to part c Phillip’s Curve: For each of the following
draw an AD/AS diagram and a corresponding Phillip’s curve
assuming the following:
(1) Suppliers produce more goods and
services when price increases;
services when price increases;
(2) actual GDP is 20,000;
(3) Fullemployment GDP is 15,000;
(4) The natural rate of unemployment
is 5%; and (5) Discretionary policies are needed because wages are
sticky. (6) Actual unemployment and output fluctuate around 5%
and 15,000.
a. Show in both diagrams the effect of an increase in open market
sales. Based on the Rational Expectations: Keynesian economists
thought of the Phillips curve as a “trade-off.” They thought policy
makers had the ability to pick low unemployment and high
inflation or high unemployment with low inflation, or combination
in between- and that the economy would stay in whatever position
they chose. Explain why this view was mistaken based upon the
following events.
is 5%; and (5) Discretionary policies are needed because wages are
sticky. (6) Actual unemployment and output fluctuate around 5%
and 15,000.
a. Show in both diagrams the effect of an increase in open market
sales. Based on the Rational Expectations: Keynesian economists
thought of the Phillips curve as a “trade-off.” They thought policy
makers had the ability to pick low unemployment and high
inflation or high unemployment with low inflation, or combination
in between- and that the economy would stay in whatever position
they chose. Explain why this view was mistaken based upon the
following events.
b. Show in both diagrams the effect of the oil price shocks of the
1970s. (Oil Prices increase).
1970s. (Oil Prices increase).
c. The technology boom of the 1990s.
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