Assume that the United States economy is currently operating above the full-employment level of real gross domestic product, caused by increased consumer confidence throughout the economy. Assume also that this country is at full employment when the natural rate of unemployment is 5% with an annual inflation rate of 2%. A) Draw a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, and show the full-employment level of output, labeled as Yf and the price level at full employment as PLf.
B) Link your AS/AD graph to a Phillips Curve showing the long run and short run position of inflation and unemployment.