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Suppose that a fall in consumer spending causes a recession. a. Illustrate the immediate change in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B. What happens to inflation and unemployment in the short run? b. Now suppose that over time expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation–unemployment combinations? Explain.

BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985
BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985

Solutions

Chapter
Section
Chapter 17, Problem 3PA
Textbook Problem

Suppose that a fall in consumer spending causes a recession.

a. Illustrate the immediate change in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B. What happens to inflation and unemployment in the short run?

b. Now suppose that over time expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation–unemployment combinations? Explain.

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