“The more people at work, the higher their bills” The Phillips Curve shows the correlation between unemployment and inflation.” In the light of this statement,(a) Draw the short-run trade-off between inflation and unemployment. How might the Central Bank move the economy from one point on this curve to another? (b) Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related. (c) Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.1. A rise in the natural rate of unemployment.2. A decline in the price of imported oil.
“The more people at work, the higher their bills” The
(a) Draw the short-run trade-off between inflation and unemployment. How might the Central Bank move the economy from one point on this curve to another?
(b) Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related.
(c) Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.
1. A rise in the natural rate of unemployment.
2. A decline in the price of imported oil.
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