Inflation pt2

Question 1

Long run Phillips curve

Answer 1

This illustrates the conflict between managing inflation and managing unemployment. Free market economists argued that the link was not that simple and that there is no long run conflict between unemployment and inflation

Question 2

Long run Phillips curve description

Answer 2

It is drawn as a vertical line at the natural rate of unemployment. This is the rate where all those who want to work at going wage rate have found employment and there is no involuntary unemployment. The original phillips curve is relabelled as the short run phillips curve.

Question 3

Factors affecting Long run Phillips curve

Answer 3

-Level of unemployment benefit
-Availability of job information
-Occupational/Geographical immobility

Question 4

How unemployment is decreased

Answer 4

When inflation is at 0, unemployment is at its normal rate. Trying to decrease unemployment, the government increases spending. This increased AD, decreases unemployment and increases inflation.

Question 5

Evaluation of Long run phillips curve

Question 6

Rational expectations

Answer 6

Expectations that factor in as much relevant information as is available when considering what the future will hold

Question 7

Adaptive expectations

Answer 7

Expectations on the future that are based on what is happening and what has happened in the recent past.