Philips Curve

Question 1

What does the short run philips curve show

Answer 1

Inverse relationship between inflation and employment

Question 2

If AD increase what happens to SRPC?

Answer 2

Moves up the curve
Prices increase and increased derived demand for labour increasing employment

Question 3

If AS (cost pull inflation) decreases what happens to SRPC

Answer 3

SRPC shifts
Increase cost of production so SRPC shift right
Stagflation occurs

Question 4

What is the LRPC

Answer 4

Output where all FOP is utilised
Economy would always return to this point at the natural rate of unemployment (5%)

Question 5

What’s needed to shift the LRPC

Answer 5

Supply side polices to SHIFT LRAS
- would cause natural rate of unemployment to fall

Question 6

Monetarist view of LRPC

Answer 6

They argue that in the long run there is no trade-off as Long Run AS is inelastic. -Monetarists argue that if there is an increase in AD, then workers demand higher nominal wages. When they receive higher nominal wages, they work longer hours because they feel real wages have increased. (their price expectations are based on last year)

However, this increase in AD causes inflation, and therefore, real wages stay the same. When they realise real wages are the same as last year, they change their price expectations, and no longer supply extra labour and the real output returns to its original level. Therefore, unemployment remains unchanged, but we have a higher inflation rate. The short-run Phillips curve shifts upwards to SRPC