Design a response to stagflation and defend the trade-off you accept
Three steps, the way the exam actually works: work through the lab, write down your own measurements, then answer a 6-point free response. What you recorded goes to the grader with your writing, so a conclusion that does not follow from your own numbers will cost you the point — exactly as it would with a real reader.
Predict before you look
- An aggregate demand shift moves output and the price level in the same direction. What does a supply shift do to those two variables?
- If a policy tool can only move one curve, can it ever improve two problems that move in opposite directions?
Nothing to submit here — these are to think through, so the prediction below is an informed one rather than a guess.
Commit to an answer now. It is not graded and being wrong costs nothing — the point is to have something specific to reconcile against once you have the data.
Answer every prediction to unlock the lab. A sentence is enough.
Run the investigation
Predictions first
The procedure and the simulation unlock once you have committed above. Observing before predicting is how a wrong intuition survives a lab intact.
Record what you measured
These are your numbers, not ours. The grader sees them, so your conclusions have to follow from what you actually recorded.
| Real GDP before the shock | |
|---|---|
| Price level before the shock | |
| Real GDP after the adverse supply shock | |
| Price level after the adverse supply shock | |
| Unemployment after the adverse supply shock | % |
| Real GDP after expansionary AD from the shocked state | |
| Price level after expansionary AD from the shocked state | |
| Real GDP after contractionary AD from the shocked state | |
| Price level after contractionary AD from the shocked state |
Answer the free response
You are advising a government facing the situation your shock created. (a) Using your data, describe what the adverse supply shock did to real GDP and the price level, and name the term for that combination. (b) Using your two policy trials, explain why neither aggregate demand action solves both problems. Cite your recorded numbers. (c) Choose one of the two policies and defend it, stating explicitly which problem you are accepting as the cost of solving the other. A defensible answer is available for either choice. (d) Identify the category of policy that could improve both output and the price level at once, explain the mechanism in terms of which curve moves and in which direction, and state one practical reason a government might not be able to rely on it.
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