Suppose that a fall in consumer spending causes a recession.
a. Illustrate the changes in the...

Question

Suppose that a fall in consumer spending causes a recession.
a. Illustrate the changes in the economy using both an aggregate-supply/aggregate-demand diagram and
a Phillips-curve diagram. 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?

David · Accepted Answer

Suppose that a fall in consumer spending causes a recession.  
a. Illustrate the changes in the economy using both an aggregate-supply/aggregate-demand 
diagram and a Phillips-curve diagram. What happens to inflation and unemployment in the short 
run?  
Answer: 
Suppose economy is initially at full employment output (Y*). Now when consumer spending 
falls, aggregate demand will fall and therefore aggregate demand curve would shift leftward 
(from AD1 to AD2). As a result, short run output will fall (from Y* to Y2) and it will be below 
potential output (Y*);

Suppose that a fall in consumer spending causes a recession. a. Illustrate the changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. What happens...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment