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Chapter 11: Q. 5 LO (page 232)

Determine the causes of short-run variations in the inflation rate

Short Answer

Expert verified

Variations in expected inflation are what causes the short-run Phillips curve to evolve.

Step by step solution

01

Definition for short run

The short run is a notion that states that at least one input is fixed while the others are variable during a given amount of time in the future.

It expresses the idea that an economy behaves differently depending on how long it has to respond to particular inputs in economics.

02

Causes of short-run variations in the inflation rate 

Changes in inflation expectations are what causes the short-run Phillips curve to move.

Workers who are considered to be totally logical and informed will understand that their nominal wages have not kept up with inflation increases (the movement from point A to point B), resulting in a fall in their real pay.

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Most popular questions from this chapter

Why do you suppose that the effects of the minimumwage-generated aggregate supply shock in Puerto Rico have persisted for several years? (Hint: The minimum wage persistently has exceeded market clearing wages for a significant fraction of the Puerto Rican labor force.)

How has the fact that thousands of people from Puerto Rico have moved to the United States to search for jobs likely influenced Puerto Rico's official unemployment rate? Explain your reasoning.

If the credit spread were to widen suddenly and thereby signal weakened credit-market sentiment, would this event foreshadow a future positive or negative aggregate demand shock? Explain.

For each question that follows, suppose that the economy begins at point A. Identify which of the other points on the diagram-point B, C, D, or E-could represent a new short-run equilibrium after the described events take place and move the economy away from point A. Briefly explain your answers.

a. Most workers in this nation's economy are union members, and unions have successfully negotiated large wage boosts. At the same time, economic conditions suddenly worsen abroad, reducing real GDP and disposable income in other nations of the world.

b. A major hurricane has caused short-term halts in production at many firms and created major bottlenecks in the distribution of goods and services that had been produced prior to the storm. At the same time, the nation's central bank has significantly pushed up the rate of growth of the nation's money supply.

c. A strengthening of the value of this nation's currency in terms of other countries' currencies affects both the SRAS curve and the AD curve.

How do you suppose that the increase in Japan's consumption tax rate affected the nation's equilibrium price level, other things being equal?
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