Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 9, Problem 4E
(a)
To determine
The impact of steeper and flatter
(b)
To determine
The factors that affect the slope of the Phillips curve.
(c)
To determine
Check whether the slope of the Phillips curve changes.
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49. What does the Phillips Curve show? Draw a hypothetical (short-run) Phillips Curve and a long run Phillips curve in
the same graph.
A.W. Phillips drew a graph which became known as the Phillips curve. Which one of the following statements regarding this curve is correct?
(a)
The variables used in the Phillips curve are interest rate and rate of unemployment;
(b)
The empirical evidence supporting the original Phillips curve came from the United States;
(c)
The original Phillips curve illustrated an inverse relationship between the natural rate of unemployment and the expected inflation rate;
(d)
The original Phillips curve illustrated a trade-off between the inflation rate and the unemployment rate.
The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.
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- (b) Assume that the household in an economy spend 75% of their extra income. Calculate the change of aggregate demand if government increase their spending by $150,000. (c) If prices keep rising, a nightmare scenario for the US economy is a real possibility New York (CNN Business) There's no denying it: Inflation is here. Consumer prices surged 7% over the past year. Housing prices have continued to soar, too. But the question on the minds of many economists and Wall Street strategists is whether something even worse could be in the cards: prices rising as the economy slows. Source: CNN Business, 12" January 2022. Examine the cause of stagflation, and how it affects the output and price level. (d) Based on part (c), what will happen to the output and price level if the US policymakers accommodate the shift in aggregate supply? State only one fiscal policy tool that the policymakers may use.arrow_forwardThe diagram opposite shows two short-run Phillips curves (PC0 and PC1). PC0 corresponds to a situation in which workers expect no inflation. (a) What is the natural rate of unemployment? (b) What is the expected rate of inflation if the Phillips curve is PC1? Suppose that the economy begins in long-run equilibrium with zero inflation and that the authorities adopt a policy of constant monetary growth because they wish to reduce unemployment below its existing level. (c) Identify the short-run effect on unemployment and inflation. Unemployment........................................................................................................................…arrow_forward) a. Draw a short run Phillips curve and show the slope of the curve and then explain what it implies for the policy makers?arrow_forward
- Using what you know about the Phillips curve, determine whether the following quantities will increase, decrease, or remain the same. a. Unemployment in the short run after an increase in inflation: (Click to select) v b. Unemployment in the long run after an increase in inflation: (Click to select) v c. Inflation in the short run after a decrease in unemployment: (Click to select) d. Inflation in the long run after a decrease in unemployment: (Click to select) |(Click to select) decrease increase remain the samearrow_forwardWhen you graph the Phillips curve, what goes on the y-axis? Change in inflation Rate of inflation Change in consumer price Change in short-run outputarrow_forwardINFLATION RATE (Percent) 1 2 5. Expectations and the Phillips curve The following graph shows an economy in long-run equilibrium at point A (grey star symbol). The vertical line is the long-run Phillips curve (LRPC). The downward-sloping curve labeled SRPC is the short-run Phillips curve passing through point A. SRPC LRPC 0 0 1 2 3 4 5 6 7 8 UNEMPLOYMENT RATE (Percent) Which of the following is true along SRPC? O The expected inflation rate is 5%. The natural rate of unemployment is 3%. The actual unemployment rate is 6%. • } - * SRPC2 ㄢ C (?) Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol) to illustrate the short-run effects of this policy. Now, suppose that-after a period of 3% inflation-households and firms begin to expect that the inflation rate will continue to be 3%. On the previous graph, use…arrow_forward
- The Phillips curve is A. a positive relationship between price stability and constant, small-increment changes in the fiscal policy on the part of the Fed. B. a positive relationship in the long run between the rate of inflation and the rate of unemployment. C. a negative relationship between the inflation rate and the unemployment rate, at least in the short run. D. a positive relationship between the unemployment rate and the real Gross Domestic Product (GDP) level.arrow_forward39. Model the Phillips curve and explain what the curve means in terms of policy.arrow_forwardThe Phillips curve represents the trade-off between: A. real GDP and inflation. B. unemployment and interest rates. C. inflation and unemployment. D. interest rates and real GDP. Economists and policymakers initially believed that the Phillips curve represented a structural relationship in the economy because they believed basic behavior of households and firms, regarding inflation and unemployment, would constantly change over long periods of time. remain unchanged constantly changearrow_forward
- The slope of the Phillips curve: Draw a graph with a steep Phillips curve anda graph with a gently sloped Phillips curve.arrow_forwardExplain how inflation was finally tamed in the early 1980's. Comment on which policy was used and how it affected the price level, output, and unemploymentarrow_forwardThe Phillips curve represents the trade-off between: A. real GDP and inflation. B. unemployment and interest rates. °c. inflation and unemployment. interest rates and real GDP. Economists and policymakers initially believed that the Phillips curve represented a structural relationship in the economy because they believed basic behavior of households and firms, regarding inflation and unemployment, would constantly change over long periods of time. remain unchanged constantly changearrow_forward
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