phillips curve

Question 1

what does the short run phillips curve show

Answer 1

a negative relationship between inflation and unemployment, as unemployment decreases, inflation increases

Question 2

what happens when unemployment is low to produce inflation

Answer 2

workers have more leverage, increasing wages and demands for goods and services

firms pay higher wages for labour - workers hold the power because there is less choice in workers

consumers have more disposable income - demand pull inflation

firms have higher costs, thereforme consumers costs increase - cost push inflation

Question 3

what happens when unemployment increases, affect on inflation

Answer 3

workers will have reduced barganning power

firms can offer lower wages, therefore lower prices for consumers

alternatively firms could keep existing prices and increase profits, rewarding the government, shareholders, or business expansion

Question 4

what is the Keynesian perspective

Answer 4

supports the view of a stable short-run trade-off between inflation amd unemployment, advocating for active fiscal and monetary policies to manage economic cycles

Question 5

what is the monetarist perspective

Answer 5

emphasizes the role of inflation expectations and argues that the trade-off is only short-term. long-term policies should focus on controlling inflation through monetary policy

Question 6

how does the phillips curve change from short run to long run

Answer 6

it remains vertical, meaning that in the long run, there is no tracde off between inflation and unemployment

Question 7

why is the long run phillips curve verticle

Answer 7

over time, workers and firms adjust their expectations about inflation. as they anticipate higher inflation, they demand higher wages or adjust prices, which neutralises the impact of monetary policy on unemployment.