Chapter 6R, Problem 1FRQ

a.

To determine

To draw: A labeled graph for the long run and short run Phillips curve and label NAIRU and equilibrium inflation rate.

Explanation of Solution

Calculation:

The long-run Phillip curve is showing the NAIRU and the equilibrium inflation rate E which is as follows:

  

Graph 1

In this graph, the short-run curve is downward sloping whereas the long-run curve is horizontal. E represents the equilibrium point whereas the long-run curve is the NAIRU (national unemployment rate).

Economics Concept Introduction

Phillip curve: Phillips curve depicts the relationship between the inflation rate and the unemployment rate. In short-run, the Phillips curve is downward sloping because the relationship is negative.

b.

To determine

To show: The effect on the graph if the increment is expected in the inflation rate.

Explanation of Solution

Graph showing the effect if there is an increase in inflation rate which is as follows:

  

Therefore, if the inflation rate is increased, the Phillips curve will shift upward as the unemployment rate will reduce.

Economics Concept Introduction

Phillip curve: Phillips curve depicts the relationship between the inflation rate and the unemployment rate. In short-run, the Phillips curve is downward sloping because the relationship is negative.