Guided Reading - The Phillips Curve

According to A.W. Phillips, what trade-off exists between inflation and unemployment?

lower unemployment rates are associated with higher rates of inflation (inverse relationship)

what kind of relationship exists between price level and unemployment?

inverse

what is the graph of the Phillips Curve showing about the relationship between inflation and unemployment?

it shows that its inverse

Today, economists agree with the conclusions of the Phillips Curve when?

in the short run

One reason for rejecting the idea of a stable, predictable Phillips Curve was the experience of the 1970s and 1980s. During those years, what was true of inflation and unemployment rates?

inflation and unemployment rates were both high

What term did the media use to describe this situation?

stagflation

Name and define what caused this (your answer to the last question) in the 70s and 80s?

aggregate supply shock - sudden, large increases in resource costs that jolt an economy short-run aggregate supply curve leftward

What "kind" of inflation is this that we have already studied?

cost push

What do economists believe about the conclusions of the Phillips Curve in the long-run?

there is no trade-off between unemployment and inflation

Complete the sentence, "Economists point out that when decades as opposed to a few years are considered …

any rate of inflation is consistent with the natural rate of unemployment prevailing at that time

what happens to wages as prices rise in the long run?

they also raise

Once this happens, do employers still have the same motivation to increase output and keep the extra workers that they hired employed?

no

Phillips was RIGHT / WRONG in the short run but RIGHT / WRONG in the long run

right

wrong

Shifts in the aggregate demand curve; aka 'Demand Shocks,':

a.) Move us along the short-run Phillips curve

b.) Shift the short-run Phillips curve

a

Shifts in the aggregate supply curve; aka 'Supply Shocks,':

a.) Move us along the short-run Phillips curve

b.) Shift the short-run Phillips curve

b

Anywhere on the short-run Philips curve that is to the left of the long-run curve shows HIGH / LOW unemployment and INCREASED / DECREASED inflation; therefore, it would be a INFLATIONARY / RECESSIONARY gap on the aggregate supply and demand graph.

a. low

b. increased

c. inflationary

Anywhere on the short-run Phillips curve that is to the right of the long-run curve shows HIGH / LOW unemployment and INCREASED / DECREASED inflation; therefore, it would be a INFLATIONARY / RECESSIONARY gap on the aggregate supply and demand graph.

a. high

b. decreased

c. recessionary

Changes in Aggregate Supply shift the Phillips curve right and left and so do changes in expected inflation (higher expected inflation → rightward shift. Lower expected inflation → leftward shift).

n/a