AP Macro FRQ: Inflation and unemployment

(A) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current long-run equilibrium point X, and mark the natural rate of unemployment on the horizontal axis. 2 points

Build the graph

GraphStartChange

Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.

(B) Consumer confidence falls sharply and aggregate demand decreases. On your graph in part A, label point Y to show the short-run effect on the economy. 1 point

Build the graph

GraphStartChange

Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.

(C) Assume no policy action is taken. Explain what happens to expected inflation and to the short-run Phillips curve in the long run. 1 point

(D) What will the unemployment rate be at the new long-run equilibrium? 1 point