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    Phillips Curve FRQs Answers

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    Duck520
    This document contains sample questions from an AP Economics exam focusing on the Phillips curve. It includes 5 questions with multiple parts each. Question 1 asks about short-run and long-run Phillips curves and how changes in government spending would shift the curves. Question 2 examines how the Federal Reserve's actions to target inflation would impact interest rates and aggregate demand. Question 3 discusses how fiscal policy and unemployment benefits impact unemployment rates. Question 4 uses graphs to show how tax cuts or doing nothing would affect short-run equilibrium. Question 5 considers how the short-run aggregate supply curve shifts in the long run without policy action.

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    Phillips Curve FRQs Answers

    Uploaded by

    Duck520
    2K views6 pages
    This document contains sample questions from an AP Economics exam focusing on the Phillips curve. It includes 5 questions with multiple parts each. Question 1 asks about short-run and long-run Phillips curves and how changes in government spending would shift the curves. Question 2 examines how the Federal Reserve's actions to target inflation would impact interest rates and aggregate demand. Question 3 discusses how fiscal policy and unemployment benefits impact unemployment rates. Question 4 uses graphs to show how tax cuts or doing nothing would affect short-run equilibrium. Question 5 considers how the short-run aggregate supply curve shifts in the long run without policy action.

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    Answers to FRQs for Phillips Curve Econ Questions

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    This document contains sample questions from an AP Economics exam focusing on the Phillips curve. It includes 5 questions with multiple parts each. Question 1 asks about short-run and long-run Phillips curves and how changes in government spending would shift the curves. Question 2 examines how the Federal Reserve's actions to target inflation would impact interest rates and aggregate demand. Question 3 discusses how fiscal policy and unemployment benefits impact unemployment rates. Question 4 uses graphs to show how tax cuts or doing nothing would affect short-run equilibrium. Question 5 considers how the short-run aggregate supply curve shifts in the long run without policy action.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views6 pages

    Phillips Curve FRQs Answers

    Uploaded by

    Duck520
    This document contains sample questions from an AP Economics exam focusing on the Phillips curve. It includes 5 questions with multiple parts each. Question 1 asks about short-run and long-run Phillips curves and how changes in government spending would shift the curves. Question 2 examines how the Federal Reserve's actions to target inflation would impact interest rates and aggregate demand. Question 3 discusses how fiscal policy and unemployment benefits impact unemployment rates. Question 4 uses graphs to show how tax cuts or doing nothing would affect short-run equilibrium. Question 5 considers how the short-run aggregate supply curve shifts in the long run without policy action.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6
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    The passage discusses the Phillips Curve model and how it can be used to analyze the relationship between unemployment and inflation. It also analyzes how monetary and fiscal policy can be used to affect aggregate demand and shift the short-run and long-run Phillips curves.

    In the short-run, lower unemployment is associated with higher inflation as the economy operates above potential output. In the long-run, unemployment returns to the natural rate and inflation expectations determine the inflation rate.

    An increase in government spending or a decrease in taxes can shift aggregate demand to the right, lowering unemployment and increasing inflation in the short-run. Contractionary monetary policy can shift aggregate demand left, raising the interest rate.

    AP Economics:

    Phillips Curve FRQs


    March 27, 2015
    Phillips Curve FRQs
    1. Assume that the economy of Hopeton is currently in long-run
    equilibrium, with a
    natural rate of unemployment equal to 5 percent and an inflation rate of
    2 percent.
    (a) Draw a correctly labeled graph of the short-run Phillips curve,
    and label the curve as SRPC. Indicate the point on the SRPC
    corresponding to the current unemployment and inflation rates,
    labeled as R.

    Correctly labeled axes; Intersection of LRPC and SRPC curves


    labeled R and at 2% inflation and 5% UR
    (b)On your graph in part (a), draw the long-run Phillips curve, and
    label it as LRPC. Vertical at 5%
    (c) Assume that the government of Hopeton increases spending to
    finance repairs and maintenance of the countrys infrastructure.
    How will such an increase in spending affect unemployment and
    inflation in the short-run? Explain. The increase in G shifts
    AD curve to the right, raising both Real GDP and Price
    Levels. This leads to decrease in unemployment and
    increase in inflation.

    (d)Show on your graph in part (a) the new point on the SRPC
    corresponding to the results that you stated in part (c), labeled
    as S. See graph
    (e) Following an increase in government spending, workers demand
    and receive a higher wage. What happens to the SRPC as a
    result of the higher wage? Explain. SPRC shifts up (right).
    With each level of unemployment, inflation will be
    higher.
    2. Assume that the United States economy is in long-run equilibrium with
    an expected inflation rate of 6 percent and an unemployment rate of 5
    percent. The nominal interest rate is 8 percent.
    (a) Using a correctly labeled graph with both the short-run and
    long-run Phillips curves and the relevant numbers from above,
    show the current long-run equilibrium as point A.

    Correct labels, point A intersection labeled 6% and 5%


    (b) Calculate the real interest rate in the long-run equilibrium. 8%6%=2%
    (c) Assume now that the Federal Reserve decides to target an
    inflation rate of 3 percent. What open-market operation should
    the Federal Reserve undertake?
    Sell securities
    (d) Using a correctly labeled graph of the money market, show how
    the Federal Reserves action you identified in part (c) will affect
    the nominal interest rate.

    Correct labels, MS shifts left, r increases

    (e) How will the interest rate change you identified in part (d) affect
    aggregate demand in the short run? Explain. AD decreases.
    Increase in r causes decrease in C, a component of AD.
    (f) Assume that the Federal Reserve action is successful. What will
    happen to each of the following as the economy approaches a new
    long-run equilibrium?
    (i) The short-run Phillips curve. Explain. SRPC shifts left
    because inflation expectations decrease.
    (ii) The natural rate of unemployment unchanged
    3. The unemployment rate is an important indicator of the health of the
    United States economy.
    (a) Assume that with the economy at full employment, the
    government implements an expansionary fiscal policy. How
    does the actual unemployment rate at the new short-run
    equilibrium compare with the natural rate of unemployment?
    UR will be below natural rate in short run
    (b)Assume that a significant number of workers are involuntarily
    changed from full-time to part-time employment. Explain how
    this will affect the number of people who are officially classified
    as unemployed. No change part time workers are
    counted as employed
    (c) Assume that the government reduces the level of unemployment
    compensation.
    (i) Explain how this affects the natural rate of unemployment.
    UR may fall as labor force expands because more

    persons will seek work after their UI benefits are


    reduced.
    (ii) Using a correctly labeled graph, show how this affects the
    long-run Phillips curve.

    Correct labels, LRPC shifts left


    4. The unemployment rate in the country of Southland is greater than the
    natural rate of unemployment.
    (a) Using a correctly labeled graph of aggregate demand and
    aggregate supply, show the current equilibrium real gross
    domestic product, labeled YC, and price level in Southland,
    labeled PLC.

    Correct labels, downward sloping AD, upward sloping SRAS,


    vertical LRAS to the right of intersection of SRAS and AD
    The President of Southland is receiving advice from two economic advisers
    Kohelis and
    Raymondabout how best to reduce unemployment in Southland.
    (b) Kohelis advises the President to decrease personal income
    taxes.
    (i) How would such a decrease in taxes affect aggregate
    demand? Explain. AD shifts to right. Decrease in taxes

    raises disposable income, raising C, a component of


    AD.
    (ii) Using a correctly labeled graph of the short-run Phillips
    curve, show the effect of the decrease in taxes. Label the
    initial equilibrium from part (a) as point A, and the new
    equilibrium resulting from the decrease in taxes as point B.

    Correct labels, downward sloping SRPC, point B at higher inflation


    rate than point A due to increase in AD.
    (c) Raymond advises the President to take no policy action.
    (i) What will happen to the short-run aggregate supply curve in
    the long run?
    Explain. SRAS will shift to the right. Wages will
    eventually fall, reducing costs to firms, who then
    increase production.
    (ii) Using a new correctly labeled graph of the short-run Phillips
    curve, show the
    effect of the change in the short-run aggregate supply you
    identified in
    part (c)(i).

    Correct labels, SRPC shifts downward

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