Ch. 19 - The Phillips Curve & Inflation

Question 1

What are inflation expectations?

Answer 1

The rate at which average prices are anticipated to rise next year

Question 2

What is demand-pull inflation?

Answer 2

Inflation resulting from excess demand

Question 3

What is cost-push inflation?

Answer 3

Inflation that results from an unexpected rise in production costs

Question 4

What are the 3 inflationary forces?

Answer 4

1. Inflation expectations
2. Demand-Pull Inflation
3. Supply Shocks & Cost Push Inflation

Inflation = Expected Inflation + Demand-pull inflation + Cost-push inflation

Question 5

What is excess demand?

Answer 5

When the quantity demanded at the prevailing price exceeds the quantity supplied

Question 6

What is insufficient demand?

Answer 6

When the quantity demanded at the prevailing price is below what’s supplied

Question 7

What is the Phillips Curve?

Answer 7

A curve illustrating the link between the output gap & unexpected inflation

Question 8

What is the labour market Phillips curve?

Answer 8

A Phillips curve linking unexpected inflation to the unemployment rate

Question 9

What is a supply shock?

Answer 9

Any change in production costs that lead suppliers to change the prices they charge at any given level of output/ Supply shocks shift the Phillips Curve

Question 10

What is a wage-price spiral

Answer 10

A cycle where higher prices lead to higher nominal wages, which leads to higher prices

Question 11

What are 3 factors that shift the Phillips Curve

Answer 11

1. Input Prices
2. Productivity
3. Exchange Rates

• Direct effect: When the Canadian dollar depreciates, foreign goods are more expensive
• Indirect effects: More expensive foreign goods lead to higher prices on domestic goods
• A depreciating Canadian dollar shifts the Phillips Curve up; An appreciating Canadian dollar shifts the Phillips Curve dwn