Unit 3: Aggregate Demand and Supply and Fiscal Policy 1 Copyright ACDC Leadership 2015

The Phillips Curve Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increase? Copyright ACDC Leadership 2015

3 In general, there is an inverse relationship between unemployment and inflation Copyright ACDC Leadership 2015

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

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

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

The Phillips Curve in real life isn’t like the textbook

AD/AS and the Phillips Curve Copyright ACDC Leadership 2015

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

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

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

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

Price Level 13 SRAS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC Copyright ACDC Leadership 2015

AD Price Level 14 SRAS GDP R QYQY LRAS Inflation SRPC Unemployment UYUY LRPC AD 2 AD 3 PL e Copyright ACDC Leadership 2015

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

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

2008 Audit Exam

18 Copyright ACDC Leadership 2015

Analyzing the Economy Graphically 19 Copyright ACDC Leadership 2015

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

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