Answer to Question #227297 in Macroeconomics for Madushika Nilmini

Question

How the Phillips Curve is related to the model of Aggregate Demand and Aggregate Supply. Explain using appropriate diagrams.

Answer 1

Relation in the short run

The aggregate demand and aggregate supply model indicates the short run relationship between price level and employment . The level of employment rises as price level rises

The Phillips curve shows the short run relationship between the level of unemployment and inflation. The level of unemployment decreases as price level rises.

Relation in the long run

When money supply increases, aggregate demand and price levels rises and therefore the rate of inflation is inclined. This occurs at natural level of output and unemployment. The change in price is indicated by a movement upward or downward a vertical long run aggregate supply curve and the long run Phillips curve