2.8 Phillips Curve Flashcards
What is the natural rate of unemployment and NAIRU?
Natural rate of unemployment is the level of unemployment that exists when the economy is at full employment, accounting for frictional and structural unemployment.
NAIRU (Non-Accelerating Inflation Rate of Unemployment) is the unemployment rate that does not cause inflation to rise.
What are the Keynesian and neo-classical approaches to aggregate supply?
Keynesian: In the short run, aggregate supply is elastic, meaning the economy can increase output without raising prices.
Neo-classical: Aggregate supply is vertical in the long run, meaning the economy operates at full capacity without inflation.
What is the difference between the short-run and long-run Phillips Curve?
Short-run Phillips Curve shows an inverse relationship between inflation and unemployment, suggesting that lowering unemployment can lead to higher inflation.
Long-run Phillips Curve is vertical, indicating no trade-off between inflation and unemployment in the long term.
How useful is the Phillips Curve for macroeconomic policymakers?
The Phillips Curve is useful for understanding the short-term trade-off between inflation and unemployment, but its applicability is limited in the long run due to the expectation of adaptive inflation and the vertical nature of the long-run curve.
