AP® Macroeconomics · Free response

A fall in consumer confidence in Sorell: the Phillips curves in the short and long run

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

Start writingAll 18 questions

The question

Name: ______________________   Date: ____________   A fall in consumer confidence in Sorell: the Phillips curves in the short and long run (5 points)

Sorell, an invented country, is in long-run equilibrium with unemployment at its natural rate of 4 percent and actual and expected inflation of 3 percent. Then a sharp fall in consumer confidence lowers consumption spending.

  1. (A) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the starting point A. Show the short-run effect of the fall in consumption by placing point B. [3 points]

  2. (B) Explain why the economy moves along the short-run Phillips curve to point B rather than shifting the curve. [1 point]

  3. (C) Assume no policy action, and that households and firms come to expect the lower inflation rate. Identify the direction the short-run Phillips curve shifts in the long run, and Sorell's long-run unemployment rate. [1 point]