Question of the Day: Day Nineteen

1. Assume that in Country X, while prices are flexible in the short run, prices are not so flexible that the economy will instantly adjust so that we are alway located at Potential GDP. I.e., it's possible for the economy to experience inflationary and recessionary gaps. In the long run, however, prices are perfectly flexible. How does this affect the Aggregate Supply curve and the Phillips curve in this economy?

2. Suppose our economy is producing at Potential. Use the Phillips Curve to show what happens if the government suddenly attempts to increase equilibrium (real) GDP above Potential GDP and keep it there.