Reference no: EM132592794

For each of the following draw an AD/AS diagram and a corresponding Phillip's curve assuming the following: 

(1) Suppliers produce more goods and services when price increases  

(2) Actual GDP is 10,000   (3) Full employment GDP is 25,000

(4) The natural rate of unemployment is 5% and Actual unemployment is 10%

(5) Discretionary policies are needed because wages are sticky

(6) Actual unemployment and output fluctuate around 5% and 25,000 respectively

1. AD/AS diagram and a corresponding Phillip's curve for the effect of a decrease in expected inflation
2. AD/AS diagram and a corresponding Phillip's curve for the effect of Friedman and the Natural Rate Theory

For question 1 and 2, based on the Rational Expectations: Keynesian economists thought of the Phillips curve as a "trade-off." They thought policy makers had the ability to pick low unemployment and high inflation or high unemployment with low inflation, or combination in between and that the economy would stay in whatever position they chose. Explain why this view was mistaken based upon the following events.