Handout 4d - Handout 4d Inflation Adjustment-Aggregate...

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Handout 4d – Inflation Adjustment-Aggregate Supply Model Spring 2007 Page 1 of 2 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 0 4,000 8,000 12,000 16,000 20,000 24,000 28,000 inflation rate real GDP ( Y ) AD LRAS 1. The initial or beginning inflation rate is 3.0%. In the graph above, draw the initial SRAS curve and indicate the initial short-run equilibrium with a dot ‘•’ and the number ‘1’ 2. Suppose that investment spending increases by 4,000 so that the AD curve shifts right by 4,000. In the graph above, draw the new AD curve and the new short-run equilibrium with a dot ‘•’ and the number ‘2’ 3. Suppose that policymakers do nothing in response to increased investment spending. What would happen to the inflation rate to bring the economy back to full-employment? Be specific. Show this new long-run equilibrium on the diagram with a dot ‘•’ and the number ‘3’ 4. If policymakers do nothing in response to increased investment spending, which of the two macroeconomic goals – low inflation or full-employment – would the policymakers miss?
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