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Principles of Economics, 7th Editi...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165875

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BuyFindarrow_forward

Principles of Economics, 7th Editi...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165875
Chapter 35.1, Problem 1QQ
Textbook Problem
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Draw the Phillips curve. Use the model of aggregate demand and aggregate supply to show how policy can move the economy from a point on this curve with high inflation to a point with low inflation.

To determine
Phillips curve.

Explanation of Solution

Figure 1 shows the Phillips curve.

In Figure 1, the vertical axis measures the inflation rate and the horizontal axis measures the unemployment rate. The downward sloping curve is the Phillips curve. It shows the short-run tradeoff between inflation rate and unemployment. When the inflation rate is high, the unemployment rate will be less. There is a negative relationship between inflation and unemployment.

Use the model of aggregate demand and aggregate supply to show how policy can move the economy from a point on this curve with high inflation to a point with low inflation. It is explained with the help of a figure shown below.

Figure 2 shows how economic policies can move the economy from high inflation to low inflation.

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