Identify the phase (Phillips, stagflation, or recovery) the economy is in, and s
ID: 1194399 • Letter: I
Question
Identify the phase (Phillips, stagflation, or recovery) the economy is in, and suggest what change in aggregate demand or aggregate supply might have caused it. a. “President Nixon expressed satisfaction with last year’s economic performance. He said that with inflation and unemployment heading down, the nation ‘is on the right course." b. “The nation’s inflation rate rose to a record high last month, the government reported yesterday. The consumer price index jumped 0.3% in January. Coupled with the announcement earlier this month that unemployment had risen by 0.5 percentage points, the reports suggested that the first month of President Nixon’s second term had gotten off to a rocky start.” c. “President Carter expressed concern about reports of rising inflation but insisted the economy is on the right course. He pointed to recent reductions in unemployment as evidence that his economic policies are working.”
Explanation / Answer
Philips curve shows the inverse relationship between unemployment & rate of inflation in the short run as well as long run. According to it due to increase in employment and income of the people, the rate of inflation will increase due to increase in aggregate demand in the economy.
Stagflation is a opposite situation to inflation that states Aggregate demand falls as fall in income due to unemployment situation in the economy.This can be explaiened with help of a diagram also by showing the impact on AD & AS due to increasing income & employment.
Recovery is a stage in trade cycle which shows that the economy is coming out from the recession and moving towards boom through recovery.
In the above conext as give in the question, the economy is at the stage of recovery means increasing employment & income.so, the aggregate demand will increase followed by aggregate supply.