If the economy is initially at the WS-PS equilibrium, what happens when there is a sudden increase in the aggregate demand in the economy. b) Use the WS-PS model to graphically derive a set of Philips curves and explain the economic intuition behind the diagram. Provide an explanation of how a situation of deflation could occur. What are you assuming about the real interest rate in the deflationary.

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Figure1 in the document attached below illustrates the impact of a positive demand shock or an increase in the aggregate demand for goods and services in the goods market on the WSPS model and subsequ... View the full answer