31.2 Short-Run and Long-Run Phillips Curves

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The graph shows a​ short-run Phillips curve and a​ long-run Phillips curve. The expected inflation rate increases to 7.5 percent a year. Show the effect in the graph. Draw either a new​ short-run Phillips curve labeled SRPC1 or a new​ long-run Phillips curve labeled LRPC1.

A curve line on top of SRPC

The figure shows a​ short-run Phillips curve and a​ long-run Phillips curve. The natural unemployment rate increases to 8 percent. Draw the new ​ long-run Phillips curve. Label it LRPC1. Draw the new​ short-run Phillips curve. Label it SRPC1.

A long line on 8% at the Unemployment rate and a curve line on top of SRPC

In the economy shown in the​ graph, aggregate demand starts to grow more​ rapidly, and eventually the inflation rate rises to 10 percent a year. Explain how unemployment and inflation in this economy change.

At​ first, the unemployment rate falls below 6 percent and the inflation rate rises.​ Later, as the higher inflation rate is​ expected, the unemployment rate rises toward 6 percent.

India seeks more reserve central bank There is a conflict in India between politicians who want faster growth and lower​ unemployment, and the central bank governor who wants price stability. The government is replacing the central bank governor and possibly increasing its inflation target. ​Source: The Wall Street Journal​, July​ 5, 2016 Sketch​ India's short-run and​ long-run Phillips curves if the expected inflation rate rises from 5 percent per year to 7 percent per year and the natural unemployment rate is constant at 8 percent. Draw​ India's long-run Phillips curve. Label it LRPC0. Draw​ India's short-run Phillips curve if the expected inflation rate is 5 percent a year. Label it SRPC0. Illustrate the effect of a rise in the expected inflation rate to 7 percent a​ year, other things else remaining the same. If you draw a new​ short-run Phillips curve labeled SRPC​1; if you draw a new​ long-run Phillips curve labeled LRPC1.

LPRC0 A straight up line at 8% SPRC1 a curve line from 9 to 11 SPRC0 a curve line from 8.5 to 10.5

In​ 2017, the natural unemployment rate is 7 percent and the expected inflation rate is 3 percent. Draw the​ long-run Phillips curve. Label it LRPC2017. Draw the​ short-run Phillips curve. Label it SRPC2017. In​ 2018, the inflation rate is expected to rise to 5 percent a year. Show the effect in the graph. Draw either a new SRPC curve labeled SRPC2018 or an arrow along the SRPC curve showing the direction of change.

LRPC2017 A straight up line at 7%; SPRC2018 from 9 to 9 SPRC2017 from 8 to 8.5

In​ 2016, the natural unemployment rate is 7 percent and the expected inflation rate is 4 percent. Draw the​ long-run Phillips curve. Label it LRPC2016. Draw the​ short-run Phillips curve. Label it SRPC2016. In​ 2017, the natural unemployment rate decreases to 6 percent with no change in expected inflation. Draw the​ long-run Phillips curve in 2017. Label it LRPC2017. Draw the​ short-run Phillips curve in 2017. Label it SRPC2017.

SRPC2017 a curve line from 9 to 8; SRPC2016 a curve line from 8 to 9 LRPC2017 a straight up line at 6 at Unemployment rate LRPC2016 a straight up line at 7 at Unemployment rate

The figure shows a​ short-run Phillips curve and a​ long-run Phillips curve. Identify the curves and label them. What is the expected inflation rate and what is the natural unemployment​ rate?

The​ short-run Phillips curve is curve A The expected inflation rate is 5 percent a year. The natural unemployment rate is 6 percent.

India seeks more reserve central bank There is a conflict in India between politicians who want faster growth and lower​ unemployment, and the central bank governor who wants price stability. The government is replacing the central bank governor and possibly increasing its inflation target. ​Source: The Wall Street Journal​, July​ 5, 2016 If the government replaces the central bank governor and pursues faster growth by increasing aggregate​ demand, how will inflation and unemployment​ change? How will​ India's Phillips curves​ change? If the government replaces the central bank governor and pursues faster growth by increasing aggregate demand and the expected inflation rate remains​ unchanged, _______. If the government replaces the central bank governor and pursues faster growth by increasing aggregate demand and people expect the inflation rate to​ rise, _______.

a movement occurs up along the​ short-run Phillips curve. The inflation rate rises and the unemployment rate falls the​ short-run Phillips curve shifts upward

U.S. jobs and inflation data The number of Americans filing for unemployment benefits in June was unchanged at a​ 43-year low of​ 248,000. Producer prices recorded their biggest gain in a year in June. ​Source: Reuters, July​ 14, 2016 Did the U.S. economy move along its​ short-run Phillips​ curve? If​ so, how? Or did the​ short-run Phillips curve​ shift? If​ so, how?

an upward shift of the​ short-run Phillips curve as the expected inflation rate rises

The inflation rate is 2 percent a​ year, and the quantity of money is growing at a pace that will maintain that inflation rate. The natural unemployment rate is 7​ percent, and the current unemployment rate is 9 percent. In what direction will the unemployment rate​ change? How will the​ short-run Phillips curve and the​ long-run Phillips curve​ shift? The unemployment rate will​ ______. The​ short-run Phillips curve will​ ______, and the​ long-run Phillips curve will​ ______.

fall; shift​ downward; not shift

How can the Phillips curve account for the combination of inflation and unemployment in​ 2015? Do the data for that year mean that there is no​ tradeoff? During​ 2015, the unemployment rate fell and the inflation rate fell. This combination of falling unemployment and falling inflation​ __________.

is explained by the​ short-run Phillips curve shifting downward. An​ unemployment-inflation tradeoff continues to exist but on a different​ short-run Phillips curve than in the previous year

The expected inflation rate is the inflation rate that people forecast and use to set the​ _____ and​ _____.

money wage​ rate; other money prices

From 1991 until​ 2013, the average inflation rate in Russia was 151.48 percent. Explain how a history of rapid inflation might influence the​ short-run and​ long-run Phillips curves in Russia. A history of rapid inflation would raise​ ______, which would shift​ ______.

the expected inflation​ rate; the​ short-run Phillips curve upward but leave the​ long-run Phillips curve unchanged

Because the Fed doubled the monetary base in 2008 and because the government has spent billions of dollars bailing out troubled​ banks, insurance​ companies, and auto​ producers, some people are concerned that a serious upturn in the inflation rate will​ occur, not immediately but in a few​ years' time. At the same​ time, massive changes in the global economy might bring the need for structural change in the United States. If the change in the monetary base increases the expected inflation​ rate, then​ ______. If the government bailouts lower the natural unemployment​ rate, then​ ______.

the​ short-run Phillips curve shifts​ upward; the​ short-run Phillips curve and the​ long-run Phillips curve shift leftward

The natural rate hypothesis is the proposition that when the​ _____ rate​ changes, _____ changes temporarily and eventually returns to​ _____.

​inflation; the unemployment​ rate; the natural unemployment rate

The ​long-run Phillips curve is the relationship between​ _____ and​ _____ when the economy is at full employment. The​ long-run Phillips curve is a​ _____ line at the​ _____ unemployment rate.

​inflation; unemployment;​ vertical; natural


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