Answered: (long-run Phillips Curve) Suppose the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(long-run Phillips Curve) Suppose the economy is at point D on the long-run Phillips curve shown in the accompanying exhibit. If that inflation rate is unacceptably high, how can policy makers get the inflation rate down? Would rational expectations help or hinder their efforts?

Phillips Curves in the Short Run and Long Run
Long-run
Phillips curve
5
a
C Short-run
Phillips
C
e
curve
45 6
Unempioyment rate
(percent)
Inflation rate (percent)

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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