Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 35, Problem 3CQQ
To determine
To determine: The effect of supply shocks on shift in
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“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.
What occurs when the natural unemployment rate increases?
A.
The short-run Phillips curve doesn't change and the long-run Phillips curve shifts rightward.
B.
The long-run Phillips curve doesn't change and the short-run Phillips curve shifts upward.
C.
The long-run and short-run Phillips curves shift rightward and the expected inflation rate rises.
D.
The long-run and short-run Phillips curves shift rightward and the expected inflation rate doesn't change.
tha
nks
Answer the following questions briefly.a How is the Phillips curve related to aggregate supply?b. What are the differences between demand-pull inflation and cost-push inflation?c. On what market imperfection does each aggregate supply theory rely? What dothe theories have in common?
Chapter 35 Solutions
Principles of Economics (MindTap Course List)
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- If inflation expectations rise, the short-run Phillips curve shifts. Please answer correct explain please asap please. Don't answer by pen paper plzarrow_forwardSuppose the economy is in a long-run equilibrium.a. Draw the economy’s short-run and long-run Phillips curves.b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?c. Now suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that in part (b)arrow_forwardUsing the Frieman-Phelps expectations-augmented Phillips curve, if actual and expected inflationare equal to each other, thenA)workers are correctly forecasting inflation and the economy is in long run equilibriumB)the policymaker needs to pursue expansionary policy to create more output.C)in the long run workers will adjust their expectations, resulting in a business cycle in the longrun.D)the economy is in an expansion above the natural rate of output.arrow_forward
- Using the inflation-unemployment version of the Phillips curve with adaptive expectations, ifaggregate demand increasesA)workers will realize that inflation has changed in the long run but not in the short run.B)the SRPC will immediately shift to the right as workers expect higher pricesC)workers will mistakenly work less, resulting in a decrease in inflation and increase inunemploymentD)actual inflation will be less than expected inflation, resulting in workers mistakenly workingmore and unemployment falling.arrow_forwardA. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."arrow_forwardThe diagram opposite shows two short-run Phillips curves (PC0 and PC1). PC0 corresponds to a situation in which workers expect no inflation. Explain why this new position for the economy is untenable in the long run. (e) Towards what long-run equilibrium level of unemployment will the economy tend?arrow_forward
- To pursue economic growth in the middle of the pandemic, the government decided to increase the government’s spending. Illustrate the effects of this policy by drawing the short run Phillips curves! What would happen in the long run?arrow_forwarda) Explain the concept of the natural rate of unemployment using the expectations-augmented (modified or modern) Phillips curve model. b) Why is this model useful for policy-makers?arrow_forward1. Fiscal and Monetary policy actions in the short run. Take an example 2. Changes in the AD-AS model and the Phillips curve. Take an example 3. Velocity of money rather than quantity driving prices. Take an example.arrow_forward
- Suppose that an economy has the Phillips curve π = π−1 − 0.5( u − 0.06). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relationships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.arrow_forward(a) What events of the 1970s and 1980s made economists believe that the shortrun relationship between inflation and unemployment was unstable (not fixed and permanent)? (b) Explain, using a diagram(s) and the concept of stagflation, the relationship between shifts in the SRAS curve and the position of the short-run Phillips curve.arrow_forward3. In the short run, the Phillips curve suggests a trade-off between: a) Inflation and unemployment b) Economic growth and price stability c) Interest rates and exchange rates d) Fiscal deficits and trade balancearrow_forward
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