Phillips

Question 1

What are the causes of shifts in the SRPC

Answer 1

SRPC shifts right if SRAS shifts left SRPC shifts left is SRAS shifts right Shift in AD causes a movement along the SRPC

Question 2

Explain how the SRPC shifts

Answer 2

Increase in AD —> reduces u/e and causes inflation (move along SRPC) Voluntary u/e suffer from money illusion

Question 3

What is the breakdown of the Phillips curve

Answer 3

Initially the economy is at Pt A

Increased AD causes a movement along the SRPC to point B (higher inflation and lower unemployment)

Lower unemployment —> short run phenomenon caused by voluntary unemployed suffering from money illusion

New short run equilibrium where output is above Yfe

Workers demand higher higher nominal wages (inflationary expectations)

Shifts SRAS curve to left creating a new equilibrium back at Yfe —> voluntary unemployed return to benefits as they realise that real wages haven’t changed