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# 6. Aggregate demand, aggregate supply, and the Phillips curve In...

6. Aggregate demand, aggregate supply, and the Phillips curve

In the year 2023, aggregate demand and aggregate supply in the fictional country of Bartak are represented by the curves AD2023  and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 2024. The first potential aggregate demand curve is given by the ADA curve, resulting in the outcome illustrated by point A. The second potential aggregate demand curve is given by the ADB curve, resulting in the outcome illustrated by point B.

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In the year 2023, aggregate demand and aggregate supply in the ﬁctional country of Bartak are represented by the curves Aﬂm and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 20-24. The ﬁrst potential aggregate demand curve is given by the AD).l curve, resulting in the outcome illustrated by point A. The second potential aggregate demand curve is given by the AD]; curve, resulting in the outcome illustrated by point B. ® . 103 1|]? 106 105 1|" PRICE LEVEL 103 102 101 1IJIJ l1 2 4 B 3 1|] 12 14 1B OUTPUT (Trillions of dollars)

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Suppose the unemployment rate is 6% under one of these two outcomes and 3% under the other. Based on the previous graph, you would expect___(outcome B, outcome A) to be associated with the lower unemployment rate (3%).

If aggregate demand is low in 2024, and the economy is at outcome A, the inflation rate between 2023 and 2024 is__(1.96%, 4.00%, 5.00%, 2.94%).

Based on your answers to the previous questions, on the following graph use the purple point (diamond symbol) to plot the unemployment rate and inflation rate if the economy is at point A. Next, use the green point (triangle symbol) to plot the unemployment rate and inflation rate if the economy is at point B. (As you place these points, dashed drop lines will automatically extend to both axes.) Finally, use the black line (cross symbol) to draw the short-run Phillips curve for this economy in 2024.

Note: For graphing purposes, round the inflation rate under each outcome to the nearest whole percent. For example, round 1.9% to 2.0%.

Hint: Hover your cursor over each point after you plot it to make sure you have placed it on the exact coordinate you intended.

Suppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADA  to ADB. This would cause a__(movement along, shift of) the short-run Phillips curve, resulting in__(a decrease, an increase) in the inflation rate and___(a decrease, an increase) in the unemployment rate.

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