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Unformatted text preview: In our economy, overproduction cannot be maintained because it will lead to recession, this is the classical model of thinking (conservatives) For this to be assumed wages and prices must be adjustable Also the by definition, there is no way to project how long it takes to get to full employment In the real world, prices and wages are not completely flexible, just to a certain extent, because of minimum wages, unions, and manual costsalso, we dont have the patience to wait for full employment If SRAS moves left, there is stagnant inflation, and to adjust you must increase AD, which will lead to full employment but also higher inflation The Phillips curve shows that where unemployment is high, wages go down, but when unemployment is low, wages are much higher, which therefore shows that lower unemployment leads to higher inflation and vice versa...
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- Fall '07