Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Chapter 15, Problem 10CQ
To determine
Explain the inflation situation in the mid-1970s and explain the difference between the modern view and earlier view of the
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Prior to the mid-1970s, many economists thought a higher rate of unemployment would reduce the inflation rate. Why? How does the modern view of the Phillips curve differ from the earlier view?
The period from the late 1990s to the winter of 2000 was marked by falling unemployment rates and falling inflation rates as well. How does economic theory explain this apparent violation of the Phillips curve model?
How can you show an output gap on the vertical phillips curve model?(can use the full inflation targeting model if that helps)
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- True or false? An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.arrow_forwardIf workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?arrow_forwardWhat is the Phillips Curve, and how does it relate to the trade-off between inflation and unemployment?arrow_forward
- Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?arrow_forwardInflationary expectations are an important driver of the Phillips curve relationship. What are three different ways inflationary expectations might be modelled? Depict each graphically.arrow_forwardWatch the 2012 OpenLearn from The Open University video The Phillips Curve - 60 second adventures in economics and answer the following questions based on the video and your reading of the textbook: What is the Phillips Curve? Explain. Suppose the unemployment rate in Canada is very high. If the relationship depicted by the Phillips Curve is true, what could the hands-on approach to economic policy do to reduce unemployment? How would such a policy affect inflation? Explain why both unemployment and inflation rose in the 1970s. 2. Consider the following scenarios and briefly explain how each scenario would affect short-run aggregate supply (SAS), long-run aggregate supply (LAS) or aggregate demand (AD) in Canada. In some situations, more than one may be affected. Canada produces larger number of university graduates who possess higher levels of education and skill. Depletion of resources cause increase in the prices of key inputs in production. Canada’s trading…arrow_forward
- Using the Phillips curve: imagine a country is having a higher unemployment rate than usual for a longperiod of time (higher than the natural rate). What should happen in the short term and in the longterm?arrow_forwardAccording to the Phillips curve, there is an inverse relationship between inflation and unemployment. It is possible for policymakers to “buy” lower unemployment by allowing higher inflation. Using a Phillips curve, illustrate and explain how nationwide rioting and looting will impact the economy and why this supply shock has implications for policymakersarrow_forwardAn economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. 1. What is the natural rate of unemployment for this economy? 2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. 3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.arrow_forward
- As with demand and supply analysis, changes in the economy can cause both shifts of and movements along the short-run Phillips curve. Which of the following would cause a shift of the short-run Phillips curve? Check all that apply. An increase in government spending A decrease in short-run aggregate supply An increase in the expected inflation ratearrow_forwardIn which situation will the economy move to a point on the Phillips curve where unemployment is higher? if the inflation rate increases if the government increases its expenditures if the Bank of Canada decreases the money supply if expected inflation increasesarrow_forwardIn the 1970s, it was fashionable among policymakers (and sometimes still is today) to use the Phillips Curve effect to fight unemployment. Discuss the short- and long-term effects of such a policy with the help of a graph.arrow_forward
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