1. Draw and label the SRPC 2. Assume AD increases. Describe what happens

with the Phillips Curve. 3. Assume AD decreases. Describe what happens

with the Phillips Curve. 4. The Long Run Phillips Curve has what shape. 5. What is the unemployment rate associated

with the Long Run Phillips Curve? 6. Assume the economy experiences stagflation.

Describe what happens with the Phillips Curve.

1. Draw and label the SRPC 2. Assume there is a recessionary gap and the fed takes

appropriate monetary policy. Describe what happens with the SRPC.

3. Assume there is an inflationary gap and the govt. takes appropriate fiscal policy. Describe what happens with the SRPC.

4. What is the unemployment rate associated with the Long Run Phillips Curve?

5. Assume the economy experiences SRAS shifting right. Describe what happens with the Phillips Curve.

6. Most of the study of Fiscal Policy has been about its effect on AD, but there are some that emphasize the effects Fiscal Policy has on …….. and these economists are called ……..

PHILLIPS CURVE

PHILLIPS CURVE • As fiscal policies are used to eliminate

unemployment, there comes a point where additional reductions in unemployment create more and more inflation. (text: 764)

• In the long run, there is no tradeoff b/c the economy is at full employment. So any policy that would increase aggregate demand would not create more employment, but only greater inflation. (Text 768-9) Think of AD/AS self correcting .

• CONTROVERSEY: • During the 1970’s, inflation and

unemployment increased at the same time, resulting in stagflation. By 1975, unemployment was at 8.5% and inflation hitting highs. (again in the early 80’s : unemployment 9.5%)

• It became clear that high unemployment did not ensure low inflation, and high inflation did not ensure low unemployment.

Practice

• a. Draw AD/AS model w/ recessionary gap.

Draw a short run Phillips curve side by side. • b. Identify 2 fiscal policies that would be used• c. adjust your AD/AS graph based on your

answer to part b. • d. show how the change in AD/AS would

affect the Phillips curve. • e. explain the changes and effects from parts

c and d.

LR vs. SR Phillips Curve???

LRPC

SRPC

Remind you of something?

5%What is the unemployment rate?

1. A. Show the economy in equilibrium side by side with SRPC.

B. Show the move to stagflation. C. Show the corresponding change on the SRPC2. A. Show the economy in equilibrium side by

side with SRPC. B. Show SRAS shift right . C. Show the corresponding change on the SRPC

LRPC

SRPC

5%

What Could Cause LRPC to Shift?