Answered: The diagram opposite shows two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The diagram opposite shows two short-run Phillips curves (PC₀ and PC₁). PC₀ corresponds to a situation in which workers expect no inflation.

Explain why this new position for the economy is untenable in the long run.

(e) Towards what long-run equilibrium level of unemployment will the economy tend?

nd
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A
B
D
PC,
is
PCo
Unemployment (%)
Inflation (%)

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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