All Flashcards
Describe the shape of the SRPC.
Downward sloping, indicating an inverse relationship between inflation and unemployment.
Describe the shape of the LRPC.
Vertical line at the natural rate of unemployment.
On a Phillips Curve graph, what causes a movement along the SRPC?
Changes in Aggregate Demand (AD).
On a Phillips Curve graph, what causes a shift of the SRPC?
Changes in Short-Run Aggregate Supply (SRAS).
What does a point to the right of the LRPC indicate?
Unemployment is above the natural rate.
What does a point to the left of the LRPC indicate?
Unemployment is below the natural rate.
How is the natural rate of unemployment represented on the LRPC?
It's the x-intercept of the LRPC.
How does an increase in expected inflation affect the SRPC?
It shifts the SRPC to the right.
On an AD/AS graph, show a decrease in AD. How does this relate to the SRPC?
AD shifts left, decreasing price level and real GDP. This corresponds to a movement along the SRPC towards lower inflation and higher unemployment.
On an AD/AS graph, show a decrease in SRAS. How does this relate to the SRPC?
SRAS shifts left, increasing price level and decreasing real GDP. This corresponds to a shift of the SRPC to the right, indicating higher inflation and higher 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.
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.