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AP Economics:
Phillips Curve Review FRQs
May 2016
Phillips Curve FRQs
1.
a) Draw a correctly labeled graph showing the short-run and long-run
Phillips Curve for Country X.
Correct labels; downward sloping SRPC; vertical LRPC
b) Identify how each of the following effects inflation, unemployment
and the short run Phillips Curve:
i) a decrease in government spending Decrease in G causes
decrease in AD, causing decrease in price level and Real GDP
(increasing unemployment). There is no shift in SRPC.
ii) a drop in inflationary expectations Decrease in inflationary
expectations causes decrease in inflation and UR (same
Nominal GDP + decrease in inflation leads to increase in Real
GDP). SRPC curve shifts downward (left).
c) Identify the effect of decreased unemployment-insurance benefits
on the long-run Phillips Curve. Decrease in workers choosing
unemployment. Shift LRPC to the left (decrease).
Question does not address LRAS, which would shift to the right
whenever LRPC shifts left.
2. Assume a country’s economy is in equilibrium.
a) Using a correctly labeled aggregate demand and aggregate supply
graph, show how an increase in the price of oil, an important
natural resource, will affect the following in the short-run:
i) real output
ii) price level
Correct labels; downward sloping AD curve; upward sloping
SRAS curve; SRAS shifts to left; real output decreases and price
level increases
b) Using a correctly labeled graph, show how the increase in the price
of oil affects the short-run Phillips Curve.
Correct labels; downward sloping SRPC shifts to the right
c) Assume that the central bank of the country responds to the
higher price of oil by increasing the money supply.
i) Explain the process by which the increase in the money supply
will affect the aggregate demand in the short run. Increase in
MS intersects downward sloping DM curve at lower nominal
interest rate, causing increase in I (or C), causing increase in
AD in short run.
ii) Indicate how the increase in the money supply will affect real
output and the price level. The increase in AD intersects
upward sloping SRAS curve at new equilibrium with
increased output and price level in the short run.
d) Now assume that instead of using monetary policy in response to
the oil price increase, the government reduces business taxes,
which results in lower production costs. Using a correctly labeled
graph, show the effect of the reduction in business taxes on the
following:
i) real output
ii) price level
Correct labels; downward sloping AD curve; upward sloping
SRAS curve; decrease in tax causes SRAS to shift to right, causing
increase in output and decrease in price level