Philips Curve: Assume an economy recently suffered a demand shock and is currently in a recession. Assume that in response to a recession, there is a large boost in government spending
Phillips Curve Continued
a. Starting from a point where short-run output is negative (in a recession), graph (a)(you will need to graph) uses the short-run IS-MP. Label axes, curves, and equilibrium points.
b. Use the Phillips curve model in graph (b)(you will need to graph) to show effects of a large boost in government spending in an economy. Label axes, curves, and equilibrium points.
c. What happens to short-run output if there is an increase in government spending during a recession? Show inference from graph (a).
d. What happens to the change in inflation if there is an increase in government spending during a recession? Show inference from graph (b).