Short free-response question

Plotting the Phillips curve

Unit 5
5 points
About 12 minutes

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question and its sources

The table shows data for the economy of Rennet, which is in short-run equilibrium.

Table 1. Data for Rennet

Measure	Value
Natural rate of unemployment	5%
Actual unemployment rate	8%
Actual inflation rate	1%

Source: Hypothetical data

Suggested time: 12 minutes

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Part (a)

1 point

Is Rennet's economy experiencing a recessionary (negative) output gap or an inflationary (positive) output gap? Explain using the data.

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Part (b)

2 points

Describe a correctly labeled graph of the short-run and long-run Phillips curves for Rennet. Plot the current short-run equilibrium, labeled K, using the numbers in the table.

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Part (c)

1 point

Assume no policy action is taken. Explain how Rennet's short-run Phillips curve will adjust in the long run.

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Part (d)

1 point

Suppose that new job-matching websites permanently reduce the time it takes workers to find jobs, lowering Rennet's natural rate of unemployment to 4 percent. Identify the effect on Rennet's long-run Phillips curve.

Your answer to part (d)

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