Which of the following statements is incorrect? The LRPC shifts when there is a change in...

Which of the following statements is incorrect?

The LRPC shifts when there is a change in inflation expectations.

The SRPC does not shift in the short run.

The SRPC shifts during a stagflation.

The LRPC shifts when there is a change in structural unemployment.

Expert Solution

The correct answer is (B) The SRPC does not shift in the short run.

Philips curve is derived from Aggregate supply function and if aggregate supply shifts in the short run then Philips curve will also shift in the short run. As aggregate supply shifts in the short run whenever ther eis change in expected inflation and thus SRPC will also shift in the short run.

Phillips curve is given by:

e - e* = b(u* - u)

where e = actual inflation , e* = expected inflation , u = actual unemployment rate and n = natural unemployment rate

Thus If expected price changes then Philips curve will definitely shift in the short run. Hence Philips curve will shift in the short run and so, Statement (2) is incorrect.
Hence, the correct answer is (B) The SRPC does not shift in the short run.

In the long run Philips curve is vertical and intersect x axis at natural rate of unemployment.

Change in structural unemployment will change natural unemployment and hence Long run Philips curve will shift. Same goes for expected inflation.

Hence, the correct answer is (B) The SRPC does not shift in the short run

Rahul Sunny answered 2 years ago

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