5 Steps to a 5 AP Macroeconomics 2019

122 ❯ Step 4. Review the Knowledge You Need to Score High

The point at 5 percent inflation and 2 percent unemployment will not last. Workers

realize that    their   real    wages   are falling and insist  on   a   raise! As   wages  rise,   the profits of   firms  

begin to fall, and so too does employment back to the natural rate of 4 percent (point c). At

this point both actual and expected inflation is 5 percent. Another short­run Phillips curve

runs through this point. Points a and c must lie on one long­run Phillips curve, and that

curve must be vertical. The process can repeat itself if AD continues to increase, or it can

reverse itself  if   AD falls.  You might   notice  that    this    adjustment  from    a    point  on   the    SRPC    

back to the LRPC follows the adjustment from a short­run equilibrium to the long­run

equilibrium in   the    AD/AS   model.

What    happens if   citizens   and firms   expect  a    higher rate    of   inflation  than    the actual  rate?   

Expecting higher prices in the future, consumers and firms increase purchasing now and

AD increases, which serves to increase the price level. The expectation in this case is really

a self­fulfilling prophecy.

❯ Review Questions

SRPC 1

Unemployment

Rate (%)

Inflation

Rate (%) Phillips

Curve (LR)

4%

2%

2%

5%

a SRPC 2

b

c

Figure 9.23

1. Using the model of AD and AS, what happens
   in the short run to real GDP, the price level,
   and unemployment with more consumption
   spending (C )?

REAL GDP PRICE LEVEL UNEMPLOYMENT

(A) Increases Decreases Decreases

(B) Decreases Increases Increases

(C) Increases Increases Decreases

(D) Decreases Decreases Decreases

(E) Decreases Decreases Increases

2. Which is the best way to describe the AS curve in
   the long run?
   (A) Always vertical in the long run.
   (B) Always upward sloping because it follows the
   Law of Supply.
   (C) Always horizontal.
   (D) Always downward sloping.
   (E) Without more information we cannot pre­
   dict how it looks in the long run.


3. Stagflation most likely results from
   (A) increasing AD with constant SRAS.
   (B) decreasing SRAS with constant AD.
   (C) decreasing AD with constant SRAS.
   (D) a decrease in both AD and SRAS.
   (E) an increase in both AD and SRAS.