Assume that the government’s economic outlook is shaped by Keynesian economic philosophy and policies with regard to an inflationary gap.
i) Explain and use the AD/AS model to show what happens if there is no government or central bank intervention in the economy from both a short-run and long-run scenario.
ii) How would this differ if the government’s economic outlook was shaped by Classical economic philosophy? What would be the difference in the reaction and introduction of policy?
2. According to Phillip’s curve theory, what happens in the long run if there is no intervention? How do expectations of inflation change and how is this illustrated using the Phillip’s curve graph?