Question

In: Economics

illustrate and explain the LR and SR philicps curve as they realte to shifts in the...

illustrate and explain the LR and SR philicps curve as they realte to shifts in the sars curve

Solutions

Expert Solution

The short-run Phillips curve depicts an inverse relationship between inflation of prices and the unemployment rate. However in the long run there would not be trade-off between unemployment and price inflation. An increase in short-run aggregate supply causes a decline in inflation and fall in unemployment; and results to shift of the SRPC to the left. A decrease in short-run aggregate supply causes a increase in inflation and an increase in unemployment; and results to shift of the SRPC to the right

Graph-1: In the enclosed graph, an increase in productivity causes a rightward shift of the SRAS curve; and consequently the original equilibrium E0 (intersection of SRAS0 and AD) will be moving to the new equilibrium E1 (intersection of SRAS1 and AD), and then to equilibrium, E2 (intersection of SRAS2 and AD). It depicts a higher output level and downward pressure on the level of prices at new equilibrium. It causes decline in unemployment, and a fall in the inflation.

Graph-2:.An increase in high cost causes With a shift of SRAS curve to the left from SRAS0 to SRAS1 depicts a lower output level and upward pressure on the level of prices at new equilibrium; and thus causes a increase in inflation and an increase in unemployment;


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