What is the long-run effect of expansionary monetary policy on unemployment?
No effect; unemployment returns to the natural rate.
What is the long-run effect of expansionary monetary policy on inflation?
Inflation increases.
How might government policies aimed at retraining workers affect the LRPC?
If successful, it could lower the natural rate of unemployment and shift the LRPC to the left.
How do policies that increase labor market flexibility affect the LRPC?
They may decrease the natural rate of unemployment, shifting the LRPC to the left.
What is the short-run effect of increased government spending on unemployment and inflation?
Unemployment decreases and inflation increases, moving along the SRPC.
What is the impact of wage and price controls on the Phillips curve?
They can temporarily suppress inflation but may lead to shortages and distortions, ultimately not affecting the LRPC.
How can supply-side policies affect the SRPC?
They can shift the SRPC to the left by increasing SRAS.
What is the effect of fiscal policy on LRPC?
Fiscal policy will not affect LRPC.
How does monetary policy affect SRPC?
Monetary policy affects SRPC by shifting AD.
How does supply-side policy affect LRPC?
Supply-side policy can shift the LRPC by changing the natural rate of unemployment.
What is the Phillips Curve?
A graph illustrating the inverse relationship between inflation and unemployment.
Define Short-Run Phillips Curve (SRPC).
Shows the inverse relationship between inflation and unemployment in the short run.
Define Long-Run Phillips Curve (LRPC).
Vertical line at the natural rate of unemployment, showing no trade-off between inflation and unemployment in the long run.
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is at full employment.
Define stagflation.
A situation with high inflation and high unemployment.
What are 'twin evils' in economics?
High inflation and high unemployment occurring simultaneously.
Define Aggregate Demand (AD).
The total demand for goods and services in an economy at a given price level.
Define Short-Run Aggregate Supply (SRAS).
The total quantity of goods and services firms are willing to supply at different price levels in the short run.
Define Long-Run Aggregate Supply (LRAS).
The aggregate supply when all factors of production are fully employed; represented by a vertical line.
What is a supply shock?
An event that suddenly changes the price of a commodity or service, affecting SRAS.
How does an increase in AD affect the SRPC?
Causes a movement *along* the SRPC, leading to higher inflation and lower unemployment.
How does a decrease in AD affect the SRPC?
Causes a movement *along* the SRPC, leading to lower inflation and higher unemployment.
How does an increase in SRAS affect the SRPC?
Causes the SRPC to shift left, leading to lower inflation and lower unemployment.
How does a decrease in SRAS affect the SRPC?
Causes the SRPC to shift right, leading to higher inflation and higher unemployment (stagflation).
What happens to the LRPC if the natural rate of unemployment increases?
The LRPC shifts to the right.
What does the LRPC imply about attempts to lower unemployment below the natural rate?
In the long run, it only leads to higher inflation without a sustained decrease in unemployment.
How does a positive supply shock affect the economy and the Phillips Curve?
SRAS increases, SRPC shifts left, resulting in lower inflation and lower unemployment.
How does a negative supply shock affect the economy and the Phillips Curve?
SRAS decreases, SRPC shifts right, resulting in higher inflation and higher unemployment (stagflation).
If the economy is operating on the LRPC, what is true about unemployment?
The economy is at the natural rate of unemployment.
Explain the relationship between the AD/AS model and the Phillips Curve.
The Phillips Curve is a reflection of the AD/AS model, showing the relationship between inflation (price level changes in AD/AS) and unemployment (related to output in AD/AS).
