Chapter 34, Problem 1FRQ

a)

To determine

Correctly labeled graph that shows a short-run Phillips curve with an expected inflation rate of 0% along with a long-run Phillips curve.

Explanation of Solution

The graph shows a short-run Phillips curve with an expected inflation rate of 0% along with long-run Phillips curve as:

  

The graph illustrates the inflation rate on the vertical axis and shows the real unemployment rate on the horizontal axis.

The long-run Phillips Curve is represented in a vertical line by labeling it LRPC as in the long run, there would not be a trade-off between unemployment and inflation because unemployment returns, in the long run, would remain stable to the natural rate but the inflation rate would reach its higher level.

And, new SRPC is labeled SRPC₁ which is above the original or old SRPC.

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. And unemployment is the rate of unemployed people who do not have any work or source to employ in the economy. The Philips curve represents that there is a negative or inverse relationship or trade-off between these two factors (inflation and unemployment) in the short run.

b)

To determine

Labeling point of a nonaccelerating inflation rate of unemployment

Explanation of Solution

The NAIRU is the lowest level of unemployment that can be maintained without raising inflation and wage growth.

By considering it on the graph, there is a downward slope of the short-run Phillips Curve which is labeled by SRPC₀ and it crosses the horizontal axis by intercepting LRPC which is the point of NAIRU.

And, new SRPC is labeled SRPC₁ which is above the original or old SRPC.

On the graph, the NAIRU point will be shown as:

  

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. And unemployment is the rate of unemployed people who do not have any work or source to employ in the economy. The Philips curve represents that there is a negative or inverse relationship or trade-off between these two factors (inflation and unemployment) in the short run.

c)

To determine

What happens when the government decides to decrease the unemployment rate below the nonaccelerating inflation rate of unemployment in the long-run

Explanation of Solution

The graph shows that when the unemployment rate shifts below the point of NAIRU by the government (nonaccelerated inflation rate and unemployment rate) then, it creates inflation and shifts the economy to point A in the graph. It means there are positive inflationary expectations that are responsible to shift the short-run Phillips curve to the up which is labeled by SRPC₁.

Now, the graph would be represented as:

  

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. And unemployment is the rate of unemployed people who do not have any work or source to employ in the economy. The Philips curve represents that there is a negative or inverse relationship or trade-off between these two factors (inflation and unemployment) in the short run.