Book: Phiplips Curve Flashcards
How does unemployment affect inflation
Low unemployment puts upward pressure on inflation according to the Philips curve although expectations also play a role
What is the equation for inflation
Inf = inf(e) + (m+z) - au
Why foes a higher expected inflation rate raise inflation
Because employers give higher wages so that the expected real wage is sufficiently high to retain and motivate workers
Why does an increase in product markups or unemployment benefits increase inflation
Because they are costs and an increase in currency cost is inflationary, also they increase unemployment
Why does low unemployment increase inflation
Because lowering unemployment leads to higher nominal wages which pushes up prices
Why is it hard to use the Philips curve in macroeconomic policy
Because peoples expectations will adapt to the policy so for example instead of affecting inflation it may affect the inflation rate accelerating the detrimental side of the Phillips curve
What is the natural rate of unemployment in regards to inflation
The unemployment rate in which actual inflation rate matches predicted inflation rate
(m+z) - au(n) = 0 as inf(e) = inf
How are the differences in expectation of inflation to actual inflation linked to the differences between the actual unemployment and the natural unemployment
Inf(t) - inf(t)(e) = -a*(u(t) -u(n))
t is for time period
Why does the natural rate if unemployment varie over time
Because m and z shift, businesses may face less or more competition and thus increase or decrease profit margins and unemployment benefits and worker protection and leverage may also shift with politcs
Why does the natural rate of unemployment varie across countries
Because m and z are different in different countries, they may have different labor market rigidities
What are hysteresis in an economy
When a variable does not return to its previous value even after a shock has passed
How dies strong inflation affect the Phillips curve
When inflation becomes stronger expectations change and in time more wages will be adapted to inflation and the relation becomes
Change in inf = - a/(proportion not using wage indexation)*change in unemployment
As more and more use wage indexation that adapts to inflation the relation to unemployment dispears
What is the key to both have strong worker protections and low unemployment
To place the social assistance in such a way that getting a job is still attractive. F.ex high severance pay instead if a steady unemployment insurance
What happens to the Phillips curve when inflation is zero or negative
The relation disappears as workers fight harder against cuts in their nominal wages compared to their real wages
What dies it mean for expectations to be anchored in macroeconomic termes
That a expectations are tied to a variable, if they are de anchored thy are bo longer related
