31.2 Short-Run and Long-Run Phillips Curves
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 SRPC1; 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
