Phillips Curve

Question 1

Explanation of the Phillips curve

Answer 1

If unemployment is low, more workers are earning more income, so consumption increases, AD increases, PL increases, so inflation up.
When unemployment is low, wages rise quickly as workers have bargaining power

Question 2

How do you show shifts in AD AS on Phillips curve

Answer 2

Shift in AD moves along the Phillips curve
Shift in AS shifts Phillips curve in the opposite direction

Question 3

What is the neoclassical view of PC

Answer 3

Unstable in SR - due to the role of expectations in inflation
In the LR, there is risk of government attempting to decrease NAIRU and in doing so inflation will rise and the unemployment level will return to NAIRU

Question 4

What does the LRPC look like

Answer 4

Straight line up (like neoclassical LRAS)

Question 5

How can NRU be decreased

Answer 5

Via supply side policies eg spending on education or infrastructure