1) Suppose the economy is in long-run equilibrium. Draw and correctly label the Long Run and Short-Run Phillips Curves.

2) Suddenly the price of imported Gasoline rises. Draw the effect of this supply shock on the separate AD/AS graph. Mark and Label the new Actual Inflation Rate as Point B on the Phillips Curve Graph.


3) The Fed undertakes expansionary monetary policy trying to fix this. Show the effects of this on both graphs. Mark and Label the new Actual Inflation Rate as Point C on the Phillips Curve Graph.

4) Did the Fed return the economy to its original inflation rate and original unemployment rate?

5) If the Fed tried contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?