All Flashcards
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).
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.