Final answer:
The extended AD-AS model suggests that while there can be a short-term trade-off between inflation and unemployment, long-term relationships may not follow the same patterns, such as productivity growth allowing for lower unemployment without higher inflation. Demand shocks are not typically associated with both higher unemployment and inflation, while supply shocks can lead to both rising inflation and unemployment.
Step-by-step explanation:
The extended Aggregate Demand-Aggregate Supply (AD-AS) model helps to understand how different economic factors can affect growth, unemployment, and inflation. The model includes cycles of high and low economic activity and incorporates both Keynes' law that focuses on aggregate demand in the short run, and Say's law, focusing on aggregate supply in the long run.
Regarding the statements provided by the student:
- Demand shocks typically cause unemployment and inflation to simultaneously increase. This statement is not generally supported by the AD-AS model, as demand shocks can actually lead to higher inflation but lower unemployment due to increased spending.
- In the long run, unemployment can only fall with an accompanying rise in inflation. This statement is not consistently supported as it negates the potential for productivity growth which can allow unemployment to fall without raising inflation.
- There is usually a trade-off between inflation and unemployment in the short run. This is supported in the short run by the concept of the Phillips curve which suggests that policies can target lower unemployment at the risk of higher inflation, or vice versa.
- With a supply shock, such as a sudden increase in oil prices, there can be rising inflation and unemployment at the same time. This statement is supported because supply shocks can increase costs for producers, leading to higher prices for consumers and potential layoffs in the workforce, thus increasing cyclical unemployment.