HW 10 Explain the Phillips Curve. Illustrate (that means graph) how the curve would shift if...

HW 10

Explain the Phillips Curve. Illustrate (that means graph) how the curve would shift if there was stagflation and prosperity. What does the long run Phillips look like? Why? Be specific.

Solutions

Expert Solution

Phillips curve shows the trade off between inflation and unemployment rate. Country has to face high rate of inflation in order to reduce unemployment rate. If inflation is reduced, there will be rise in unemployment rate. Both objectives can not be achieved simultaneously.

Following is diagram:

Above diagram, shows the tradeoff between unemployment and inflation rate. Inflation rises when unemployment rate is reduced.

Shift in phillips curve:

Stagflation will shift phillips curve to right, leading to rise in inflation and unemployment rate.

Prosperity leads to rise in employment rate, hence phillip curve shifts to left.

Following is diagram:

Long run Run Phillips curve:

Long run phillips curve is vertical or due to adaptive expectations, unemployment stays at natural rate of unemployment. There is no tradeoff between unemployment and inflation.

Rahul Sunny answered 8 months ago

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