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Unit 3: Aggregate Demand and Supply and Fiscal Policy 1 Copyright ACDC Leadership 2015
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The Phillips Curve Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increase? Copyright ACDC Leadership 2015
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3 In general, there is an inverse relationship between unemployment and inflation Copyright ACDC Leadership 2015
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Inflation 4 SRPC Short Run Phillips Curve Unemployment 2%9% 1% 5% When the economy is overheating, there is low unemployment but high inflation When there is a recession, unemployment is high but inflation is low Copyright ACDC Leadership 2015
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Inflation 5 SRPC Short Run Phillips Curve Unemployment 2%9% 1% 5% What happens when AS falls causing stagflation? Increase in unemployment and inflation SRPC 1 Copyright ACDC Leadership 2015
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Inflation 6 Short Run vs. Long Run Unemployment 2%9% 1% 5% 3% 5% Long Run Phillips Curve In the long run there is no tradeoff between inflation and unemployment The LRPC is vertical at the Natural Rate of Unemployment Copyright ACDC Leadership 2015
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The Phillips Curve in real life isn’t like the textbook
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AD/AS and the Phillips Curve Copyright ACDC Leadership 2015
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Price Level 9 AD AS AD/AS and the Phillips Curve GDP R QYQY PL e LRAS Inflation SRPC Unemployment UYUY LRPC Show what happens on both graphs if AD increase AD 1 Copyright ACDC Leadership 2015
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Price Level 10 AD AS AD/AS and the Phillips Curve GDP R QYQY PL e LRAS Inflation SRPC Unemployment UYUY LRPC Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls? AD 1 Copyright ACDC Leadership 2015
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Price Level 11 AD AS AD/AS and the Phillips Curve GDP R QYQY PL e LRAS Inflation SRPC Unemployment UYUY LRPC Correctly draw the LRPC and SRPC at full employment. What happens when AS falls? AS 1 SRPC 1 Copyright ACDC Leadership 2015
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Price Level 12 AD AS AD/AS and the Phillips Curve GDP R QYQY PL e LRAS Inflation SRPC Unemployment UYUY LRPC Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up? AS 1 SRPC 1 Copyright ACDC Leadership 2015
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Price Level 13 SRAS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC Copyright ACDC Leadership 2015
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AD Price Level 14 SRAS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC AD 2 AD 3 PL e Copyright ACDC Leadership 2015
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AD Price Level 15 SRAS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC AS 1 PL e AS 2 SRPC 1 SRPC 2 Copyright ACDC Leadership 2015
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AD Price Level 16 AS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC AS 2 PL e SRPC 1 AD 2 Copyright ACDC Leadership 2015
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2008 Audit Exam
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18 Copyright ACDC Leadership 2015
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Analyzing the Economy Graphically 19 Copyright ACDC Leadership 2015
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Use the following models to show full employment, a recessionary gap, and an inflationary gap. 1. PPC 2. Business Cycle 3. AD/AS 4. Phillips Curve Copyright ACDC Leadership 2015
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The Good, the Bad, and the Ugly UnemploymentInflationGDP Growth Good6% or less1%-4%2.5%-5% Worry6.5%-8%5%-8%1%-2% Bad8.5 % or more9% or more.5% or less 21 Copyright ACDC Leadership 2015
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