To explain:
The difference between short-run and long-run
Explanation of Solution
At natural rate of
The difference between the short-run Philips curve and long-run Philips curve is shown in the diagram below:
On the left, the Aggregate
On the right, the increases in the price level translate to higher inflation. This leads to lower rates of unemployment (U) in the short run. Starting at a point a, the curve moves to point b. However, as Aggregate Supply decreases, the Short-Run Philips curve shifts up. Moving from point b to point c, the inflation stays high and the unemployment increases. In the long run, the unemployment is fixed with respect to the inflation rate.
Philips Curve:
Phillips curve is a graphical representation of the relationship between inflation rate and unemployment. This curve states that there is an inverse relationship between inflation and unemployment.
Aggregate demand:
Aggregate demand is the total demand for final goods and services at a given time.
Aggregate supply:
Aggregate supply is the total supply of goods and services available in a market place.
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Chapter 14 Solutions
Macroeconomics (MindTap Course List)
- What is the "Phillips Curve"? Why do inflation and unemployment tend to be inversely related?arrow_forwardWhat is the effect of an increase in aggregate demand on the short-run Phillips curve? When aggregate demand increases, _______. A. the short-run Phillips curve shifts upward B. the short-run Phillips curve shifts downward C. a movement occurs upward along the short-run Phillips curve D. a movement occurs downward along the short-run Phillips curvearrow_forwardHi, could you help me solve this problem? Consider an increase in global oil and gas prices from the point of the euro area (that does not produce much oil or gas itself). Think of this shock as a supply shock and use the AD-AS -model to explain how it is likely to affect output (or unemployment) and inflation. How does your result relate to the original Phillips curve? Your answer should include a graph and a short explanation in words.arrow_forward
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- The following graphs show the state of an economy that is currently in Tong-run equilibrium. The first graph shows the aggregate demănd (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phìllips curves (LRPC and SRPC). LRAS AD LRAS AD 12 15 18 OUTPUT (Trillions af dollars) LRPC SRPC LRPC SRPC 10 12 UNEMPLOYMENT RATE (Percent) Which of the following statements are true based on these graphs? Check all that apply. - The current quantity of output is greater than potential output. The natural level of output is $9 trillion. - The unemployment rate is currently 6% higher than the natural rate of unemployment. Suppose the central bank of the economy increases the money supply. Show the long-run effects of this policy on both of the graphs by shifting the appropriate curves. in the The long-run effect of the central bank's policy is inflation rate, real GDP. in the unemployment rate, and in INFLATION RATEarrow_forwardThe slope of the Phillips curve: Draw a graph with a steep Phillips curve anda graph with a gently sloped Phillips curve.arrow_forwardUnder the assumption of anticipated shocks, can policymakers exploit the Phillips curve relationship in the short-run? In the long run?arrow_forward
- Changing the slope of the Phillips curve: Suppose the slope of the Phillips curve the parameter -increases. How would the results differ from the Volcker disinflation example considered in the chapter? What kind of changes in the economy might influence the slope of the Phillips curve?arrow_forwarda) Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain. b. Discuss the factors determining the slope of the short-run Phillips curve. Is the linear shape appropriate? Why or why not?arrow_forwardPlease answer fastarrow_forward
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