New+Ch[1].22+Answer - Ch.22 Answer Problems and...

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Unformatted text preview: Ch.22 Answer Problems and Applications 1. Figure 8 shows two different short-run Phillips curves depicting these four points. Points A and D are on SRPC 1 because both have expected inflation of 3%. Points B and C are on SRPC 2 because both have expected inflation of 5%. Figure 8 2. a. A rise in the natural rate of unemployment shifts the long-run Phillips curve to the right and the short-run Phillips curve up, as shown in Figure 9. The economy is initially on LRPC 1 and SRPC 1 at an inflation rate of 3%, which is also the expected rate of inflation. The increase in the natural rate of unemployment shifts the long-run Phillips curve to LRPC 2 and the short-run Phillips curve to SRPC 2 , with the expected rate of inflation remaining equal to 3%. Figure 9 b. A decline in the price of imported oil shifts the short-run Phillips curve down, as shown in Figure 10, from SRPC 1 to SRPC 2 . For any given unemployment rate, the inflation rate is lower, because oil is such a significant aspect of production costs in the economy. Figure 10 c. A rise in government spending represents an increase in aggregate demand, so it moves the economy along the short-run Phillips curve, as shown in Figure 11. The economy moves from point A to point B, with a decline in the unemployment rate and an increase in the inflation rate. Figure 11 d. A decline in expected inflation causes the short-run Phillips curve to shift down, as shown in Figure 12. The lower rate of expected inflation shifts the short-run Phillips curve from SRPC 1 to SRPC 2 . Figure 12 Figure 13 3. a. Figure 13 shows how a rise in investment spending causes an expansion in both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. In both diagrams, the economy begins at full employment at point A. The rise in investment spending increases aggregate demand, shifting the aggregate-demand curve to the right from AD 1 to AD 2 . The economy initially remains on the short-run aggregate-supply curve SRAS 1 , so the new equilibrium occurs at point B. The movement of the aggregate- demand curve along the short-run aggregate-supply curve leads to a movement along short-run Phillips curve SRPC 1 , from point A to point B. The higher price level in the , from point A to point B....
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New+Ch[1].22+Answer - Ch.22 Answer Problems and...

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