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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?

To determine

Stability of down-ward sloping Philips curve is to be determined.

Explanation

Phillips curve shows trade-off between unemployment and inflation in short run. As inflation rate goes higher, unemployment will decline and vice-versa. However, in long-run, as aggregate supply increases, it will shift Philips curve to right leading to increase in unemployment rate and inflation both simultaneously.

Reasons for shift of Philips curve:

  1. Supply shock

A sudden or unplanned increase in supply of an economy leads to supply shock. It is unfavorable for an economy if Philips curve shifts rightward as it will lead to increase in both inflation and unemployment. This situation is considered as stagflation because inflation is occurring with unemployment.

For example, if prices of crude oil increases suddenly, it will lead to increase in transportation cost...

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