Answered: “The more people at work, the higher…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter1: Ten Principles Of Economics

Section: Chapter Questions

Problem 6CQQ

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Question

“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.

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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