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21 Cards in this Set
- Front
- Back
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Philips curve |
A graph showing the short-run relationship between the unemployment rate and the inflation rate. The relationship is inverse. |
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If there is slow growth in the economy, then |
there is high unemployment and low inflation |
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If there is fast growth in the economy, then |
there is low unemployment and high inflation |
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The Philips curve shows only ______ in the inflation rate and unemployment rate |
changes |
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There is _________ to higher inflation and lower unemployment |
permanent trade-off (you can't just pick a combination of inflation rates and unemployment rates) |
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Why is there no permanent trade-off? |
Because in the long-run, the economy will always return to the natural rate of unemployment. |
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In the long run, a higher price level..... |
has no effect on real GDP. Real GDP is always at potential GDP in the long-run. |
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In the long-run, the Philips curve... |
Is a vertical line at the natural rate of unemployment. |
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If there is no long-run trade-off, then why does the economy experience a short-run trade off? |
Because of the differences between the expected inflation rate and the actual inflation rate, this could cause unemployment to rise or fall above or below the natural rate of unemployment. |
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How does higher than expected inflation affect the unemployment rate? |
Wages are negotiated beforehand taking into account what the "expected" inflation rate is. If the inflation rate is higher than expected, then the real wage is lower and the firm will hire more people. Unemployment will decrease. |
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How does lower than expected inflation affect the unemployment rate? |
If the inflation rate is lower than expected, then the real wage of a worker will be higher. If the real wage is higher, then the firm will higher less people. Unemployment will increase. |
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To affect the unemployment rate, the change in the inflation rate needs to be..... |
unexpected |
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The LRPC and the SRPC intersect when |
expected inflation equals actual inflation |
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What causes a shift of the SRPC curve? |
Changes in the expectation of the inflation rate. The "new normal" become embedded in the economy. The SRPC shifts up to intersect the LRPC at the new expected rate of inflation. |
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Non accelerating inflation rate of unemployment (NAIRU) |
The unemployment rate at which the inflation rate has no tendency to increase or decrease.Also called the natural rate of unemployment. |
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In the long run, the Fed can affect the inflation rate, but.... |
not the unemployment rate. |
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What shifts the natural rate of unemployment? |
1. Demographic changes (baby boomers) 2. Labor market initiatives (unemployment insurance systems) 3. Past high rates of unemployment |
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How does a supply shock affect the SRPC? |
A supply shock shift the SRPC to the right, leading to both higher inflation rate and higher unemployment at each point. |
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Growth in AD will.... |
move the economy on a higher point on the SRPC |
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If Matt's real wage is 26.40 and the price level is 104, then what is his nominal wage? |
27.87 |
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What best explains the slope of the SRPC? |
Weak growth in aggregate demand keep the economy below potential GDP, so unemployment rises but inflation falls |
