AD/SRAS/LRAS and Phillips Curve Group Assignment
1. Draw an AD/SRAS/LRAS model.
a. Label output at full employment.
b. Shade the area of recessionary gap in pink. Explain why this area would represent a
recessionary gap.
c. Shade the area of inflationary gap in blue. Explain why this area would represent an
inflationary gap.
2. Draw a SR Phillips Curve and Long-Run Phillips Curve model.
a. Label the Natural Rate of Unemployment.
b. Shade the portion of the curve that would represent a recessionary gap pink. Explain
why this would represent a recessionary gap.
c. Shade the portion of the curve that would represent an inflationary gap blue. Explain
why this would represent an inflationary gap.
3. Draw an AD/SRAS/LRAS and Phillips Curve (LR and SR) showing an economy in long run
equilibrium.
a. Assume that due to war, government begins to spend heavily.
b. If no fiscal or monetary action is applied, show what happens to the AD/SRAS/LRAS
model. What happens to each of the following?
i. Output in the short run
ii. Nominal wages in the long run
iii. SRAS in the short run
iv. Price level in the long run
v. Output in the long run
c. Show and explain what will happen with the SRPC and LRPC model.
4. Draw an AD/SRAS/LRAS and Phillips Curve (LR and SR) showing an economy in long run
equilibrium.
a. Assume that the economy is shocked by high oil prices.
b. If no fiscal or monetary action is applied, show what happens to the AD/SRAS/LRAS
model. What happens to each of the following?
i. Output in the short run
ii. Nominal wages in the long run
iii. SRAS in the short run
iv. Price level in the long run
v. Output in the long run
c. Show and explain what will happen with the SRPC and LRPC model.