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 yearâs economic performance. He said that with inflation and unemployment heading down, the nation âis on the right course."
b. "The nationâs 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 Nixonâs 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."

Answer 1

Answer:

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."  

⇒ RECOVERY. Economic recovery refers to the economy starting to grow again after a period of recession. A rightward shift in the aggregate supply curve should decrease unemployment and reduce inflation.

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."

⇒ STAGFLATION. Stagflation refers to a combination of high inflation and high unemployment. A leftward shift in the aggregate supply curve can result in stagflation.

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."

⇒ PHILLIPS. According to the Phillips curve, inflation and unemployment are inversely correlated. if inflation goes up, unemployment should go down. Phillips theory was discredited due to stagflation occurring during Nixon's presidency. Nixon created stagflation for the first time in the US since it isn't normal that inflation rises as unemployment increases. That shows you how good a president he was, he even invented new things for Americans to enjoy.