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Chapter 17: Q. 4 (page 394)

Suppose that people who previously had held jobs become cyclically unemployed at the same time the inflation rate declines. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

Short Answer

Expert verified

As a result, the unemployment rate or the inflation rate stays fixed while the other changes, the short-run Philips curve shifts. and the quick Philips curve will go downward when the unemployment rate rises and the inflation rate falls.

Step by step solution

01

Step; 1 Introduction:

The Philips curve illustrates the inverse link between inflation and unemployment.

In other words, the Philips curve depicts the trade-off between inflation and unemployment, i.e., in order to reduce unemployment, a higher inflation rate must be paid, and vice versa.

02

Step: 2 Phillips curve:

When both the rate of inflation and the rate of unemployment fluctuate at the same time, change is along short-run Philips curve happens.

But from the other hand, if either the unemployment rate or the inflation rate stays fixed while the other changes, the short-run Philips curve shifts.

03

Step; 3  Movement of phillips curve:

There is change along the quick Philips curve in the present scenario due to repeated changes in jobless rate (unemployed rate has increased as recession is increasing) and rate of inflation (inflation rate is dropping).More specifically, the quick Philips curve will go downward when the unemployment rate rises and the inflation rate falls.

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Most popular questions from this chapter

The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. Make lists of possible factors affecting workers and firms that you believe are likely to influence the natural rate of unemployment.

Consider Figure 17-5, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. In the long run, will an increase in the inflation rate to 3percent result in the economy operating at point Bor at point F1? Explain your reasoning.

Why might it be the case that even if distorted beliefs alter real GDP and the unemployment rate today, such beliefs might be unlikely to arise among households and firms again in the future? Explain your reasoning.

Normally, when aggregate demand increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged if their profit gain from adjusting prices is less than the menu costs they would incur if they change prices. If firms anticipate that a rise in demand is likely to last for a long time, does this make them more or less likely to adjust their prices when they face small menu costs? (Hint: Profits are a flow that firms earn from week to week and month to month, but small menu costs are a one-time expense.)

Would a U6 version of the natural unemployment rate likely be higher or lower than the traditional natural unemployment rate? Explain your reasoning.
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