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9 Cards in this Set
- Front
- Back
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Explain what is meant by the "wage-price" spiral. |
The mechanism by which increases in wages lead to increases in prices, which lead in turn to further increases in wages, and so on. |
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Based on the "early incarnation" of the Phillips curve, explain what effect an increase in the unemployment rate will have on the inflation rate. |
An increase in unemployment will lead to a decrease in inflation. |
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During which decade did the original Phillips curve break down? Also, briefly explain why the original Phillips curve broke during this period. |
1970s. compares inflation and unemployment. - one reason was increased oil prices which caused firms to increase their markup, regardless of current unemployment. - wage setters changed the way they set their expectations |
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Explain how the original Phillips curve differs from the expectations-augmented Phillips curve (or the modified, or accelerationist Phillips curve). |
Original Phillips curve stated an increase in unemployment led to lower inflation. But modified Phillips curve states increased unemployment leads to decreasing inflation. |
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Based on your understanding of the Phillips curve, explain what happens to actual inflation (relative to expected inflation) when the actual unemployment rate is either above or below the natural rate of unemployment. |
- When the actual unemployment rate is above the natural rate of unemployment, inflation decreases. - When the actual unemployment rate is below the natural rate of unemployment, inflation increases. |
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Briefly comment on the predictions of economists Friedman and Phelps about the ability to exploit a trade-off b/w inflation and unemployment. |
Their predictions that you cannot exploit the trade-off b/w inflation and unemployment were correct. Policy makers would always have to under-predict inflation, which is unlikely. |
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Based on your understanding of the Phillips curve, is it possible for the unemployment rate to increase while inflation increases? Explain. |
Based on the Phillips curve relation that isn't typically possible, however in reality, there are outside factors in play that could cause this to be true |
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Based on the "early incarnation" of the Phillips curve, explain what effect a decrease in the unemployment rate will have on the inflation rate. |
A decrease in the unemployment rate will result in a higher inflation rate. |
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Explain the natural unemployment rate and its relationship to inflation rate. |
Natural unemployment rate is the rate at which unemployment cannot be sustained lower. The natural unemployment rate is the unemployment rate where actual inflation equal expected inflation. |
