AP Macroeconomics 5.2: The Phillips Curve

Use SRPC and LRPC graphs to analyze inflation, unemployment, natural unemployment, expected inflation, and recessionary or inflationary gaps.

[Maximum number: 3]

Assume that the economy of Barrikos is in short-run equilibrium, with its economic data

summarized in the table provided. The government budget is balanced, and the capital and

financial account (CFA) balance is zero.

(a)

Using the relevant numerical values, draw a correctly labeled graph of the short-run and

long-run Phillips curves for Barrikos. Indicate the current short-run equilibrium with a point

labeled X. Plot the relevant numerical values on the graph.

[ 2 ]

B Point 2 Point 2	Draw a correctly labeled graph of the short-run Phillips curve (SRPC).	1 point
Point 3	The graph must include a vertical long-run Phillips curve (LRPC) at the natural rate of unemployment (4%), the expected inflation rate (5%) at the intersection of the SRPC and the LRPC, and a point labeled X on the SRPC to the right of the LRPC at the actual unemployment rate (10%) and the actual inflation rate (3%).	1 point

(b)

Assume that the fiscal policy action identified in part C is implemented.

[ 1 ]

(i)

Assume there is no change in inflationary expectations. On your graph in part B, show

a possible new short-run equilibrium point, labeled Z, that would result from the fiscal

policy action identified in part C.

[ 1 ]

(ii)	On the graph from part B, show a point labeled Z on the SRPC to the left of point X. Point 6	1 point
	Inflation Rate (%)

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