The following graph shows that the Phillips curve (expressing the relation between inflation and unemployment) has flattened over time in the eurozone. Illustrate the flattening of the Phillips curve in the IS-LM-PC graph. What are the implications of the flattening of the Phillips curve for a central bank that i) needs to assess the size of the output gap in order to reduce it and/or ii) aims at bringing inflation in line with target inflation? Explain in words and show graphically. Discuss why the fact that the flattening of the Phillips curve might not be immediately observed by the central bank can be a problem for the conduct of monetary policy. (x-axis: percentages; y-axis: annual percentage changes) 1999-2007 2008-2018 HICPX inflation 3.0 2.5 2.0 1.5 1.0 0.5 0.0 6 9 10 Unemployment rate Sources: Eurostat and ECB calculations. Note: Linear regression lines for the two samples are shown in grey. 11 8 12 13

The following graph shows that the Phillips curve (expressing the relation between inflation and unemployment) has flattened over time in the eurozone. Illustrate the flattening of the Phillips curve in the IS-LM-PC graph. What are the implications of the flattening of the Phillips curve for a central bank that i) needs to assess the size of the output gap in order to reduce it and/or ii) aims at bringing inflation in line with target inflation? Explain in words and show graphically. Discuss why the fact that the flattening of the Phillips curve might not be immediately observed by the central bank can be a problem for the conduct of monetary policy. (x-axis: percentages; y-axis: annual percentage changes) 1999-2007 2008-2018 HICPX inflation 3.0 2.5 2.0 1.5 1.0 0.5 0.0 6 9 10 Unemployment rate Sources: Eurostat and ECB calculations. Note: Linear regression lines for the two samples are shown in grey. 11 8 12 13

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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