Suppose that a fall in consumer spending causes a recession.
A. Illustrate the changes in the economy using both aggregate-supply/aggregate demand diagram and a Phillips-curve diagram. What happens to inflation and unemployment in the short run?
B. Now suppose that over time expected inflation changes in the same direction that actual information changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations?