00:01
And question three, we're being asked to suppose that a fall in consumer spending causes a recession.
00:07
Part a says, illustrate the immediate change in the economy using both an aggregate supply, or demand diagram, and a phillips curve diagram.
00:15
On both graphs, labeled the initial longer equilibrium as point a and the resulting short -ranking equilibrium as point b.
00:21
What happens to inflation and unemployment in the short run? well, let's go back to our old friend, the adas graph.
00:30
On the x -axis, we have the quantity of output y.
00:34
On the y -axis, we have the price level p.
00:36
And as always, downward sloping, aggregate demand curve, upward sloping, short and aggregate supply curve.
00:43
And a vertical, longer, an aggregate supply curve.
00:46
So initially, i've drawn here on the left.
00:48
You can see a lot of things are going on, but let's concentrate on the intersection of ad1 and sras1.
00:56
So the economy begins at point a at the...
01:00
Longer on equilibrium and full employment.
01:04
Now there's a decline in consumer spending which reduces aggregate demand and thus shifts the aggregate demand curve to the left from 81 to 82.
01:14
So our new equilibrium point is intersection of ad2 with sras1 point b.
01:20
And as you can see here this corresponds to a lower level of output y2 and thus the difference between y2 and y1 is the recessionary gap.
01:31
Now as far as the phillips curve, the short -term phillips curve is concerned with drawn a diagram on the right.
01:40
On the x -axis, we have unemployment level u, y -axis is the inflation rate, which i denoted with the greek letter pi.
01:48
The long -run phillips curve is always vertical, and the economy is a short -term phillips curve, srpc1.
01:56
So let's think about it.
01:57
What happens here? the economy initially, the movement of the aggregate demand curve along the short run aggregate supply curve leads to a movement along the short run phillips curve, srpc1.
02:13
And since we're dealing with a recession, the economy goes from 0 .9 to point b to point b, shifts, moves along the short run phillips curve.
02:23
It doesn't shift.
02:23
The phillips curve doesn't shift at this point because this is an aggregate demand shock...