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Tutorial Chapter 35 - Tutorial Chapter 35 Question 1 a A...

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Tutorial Chapter 35 Question 1 a) A rise in the natural rate of unemployment shifts the long run Phillips curve to the right. The economy is initially on LRPC1 and SRPC1 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 LRPC2 and the short run Phillips curve to SRPC2, with the expected rate of inflation remaining equal to 3%. b) A decline in the price of imported oil shifts the short-run Phillips curve down from SRPC1 to SRPC2. For any given unemployment rate, the inflation rate is lower, since oil is such a significant aspect of production costs in the economy.
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c) A rise in government spending represents an increase in aggregate demand, so it moves the economy along the short-run Phillips curve. The economy moves from point A to point B, with a decline in the unemployment rate and an increase in the inflation rate. d) A decline in the expected inflation causes the short run Phillips curve to shift down. The lower rate of expected inflation shifts the short-run Phillips curve from SRPC1 to SRPC2. Question 2 a) Figure shows the economy in long-run equilibrium at point A, which is on both the  long-run and shortrun Phillips curves.
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b) A wave of business pessimism reduces aggregate demand, moving the economy to  point B in the figure. The unemployment rate rises and the inflation rate declines. If 
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