Comprehensive Phillips Curve and Inflation-Unemployment Relationship in Economics

What is the Phillips Curve?

The Phillips Curve shows the relationship between inflation and unemployment, indicating that in the short run there is a tradeoff between the two.

What is the Short-Run Phillips Curve (SRPC)?

The Short-Run Phillips Curve is downward sloping and shows an inverse relationship between inflation and unemployment.

What is the Long-Run Phillips Curve (LRPC)?

The Long-Run Phillips Curve is vertical at the natural rate of unemployment because inflation does not affect unemployment in the long run.

What is the natural rate of unemployment?

The natural rate of unemployment is the rate the economy tends toward in the long run, including frictional and structural unemployment.

What is expected inflation?

Expected inflation is the rate of inflation that people anticipate when making economic decisions.

What are adaptive expectations?

Adaptive expectations occur when people base their expectations of future inflation on past inflation rates.

What is the sacrifice ratio?

The sacrifice ratio measures the cost of reducing inflation in terms of lost output or higher unemployment.

What is stagflation?

Stagflation is a situation where inflation rises, unemployment rises, and output falls simultaneously.

What is the short-run relationship between inflation and unemployment?

In the short run, lower unemployment leads to higher inflation, while higher unemployment leads to lower inflation.

Why does the short-run tradeoff between inflation and unemployment exist?

The tradeoff exists because higher demand increases output and employment while wages adjust slowly in the short run.

What do expansionary policies do to the economy?

Expansionary policies increase aggregate demand, increase output, lower unemployment, and increase inflation.

What do contractionary policies do to the economy?

Contractionary policies decrease aggregate demand, reduce inflation, and increase unemployment.

Why is the Long-Run Phillips Curve vertical?

The LRPC is vertical because expectations adjust, wages and prices fully adjust, and unemployment returns to the natural rate in the long run.

Why does expected inflation matter?

Expected inflation matters because when people expect higher inflation, workers demand higher wages and firms raise prices.

What happens to the SRPC when expected inflation increases?

When expected inflation increases, the Short-Run Phillips Curve shifts upward.

What happens to the SRPC when expected inflation decreases?

When expected inflation decreases, the Short-Run Phillips Curve shifts downward.

How do adaptive expectations affect inflation?

Adaptive expectations cause people to adjust expectations based on past inflation, leading to gradual shifts in the Phillips Curve.

What tradeoff do policymakers face in the short run?

Policymakers face a tradeoff between reducing unemployment and increasing inflation or reducing inflation and increasing unemployment.

What does the sacrifice ratio measure?

The sacrifice ratio measures the amount of output lost to reduce inflation.

Why is lowering inflation costly?

Lowering inflation is costly because it requires a period of high unemployment or reduced output.

What conditions define stagflation?

Stagflation occurs when inflation rises, unemployment rises, and output falls at the same time.

What causes stagflation?

Stagflation is caused by negative supply shocks, such as rising oil prices.

What happens graphically during stagflation?

During stagflation, the Short-Run Phillips Curve shifts upward and the Short-Run Aggregate Supply curve shifts left.

What happens if the government pushes unemployment below the natural rate in the short run?

In the short run, unemployment decreases and inflation increases.

What happens in the long run if unemployment is pushed below the natural rate?

In the long run, expectations adjust, unemployment returns to the natural rate, and inflation remains high.

What graphs must students be able to draw for the Phillips Curve?

Students must be able to draw the Short-Run Phillips Curve, Long-Run Phillips Curve, shifts in the SRPC, movement along the SRPC, and a stagflation graph.

What are the correct labels for a Phillips Curve graph?

The vertical axis should be labeled inflation rate, the horizontal axis should be labeled unemployment rate, and the natural rate of unemployment should be clearly marked.