phillips curve type shit

Question 1

when theres a change in ad, does this affect srpc or lrpc

Answer 1

srpc

Question 2

how is this shown on graph (dont deep too much)

Answer 2

Move along srpc

Question 3

when theres a change in sras, does this affect srpc or lrpc

Answer 3

srpc

Question 4

how is this shown on graph (dont deep too much)

Answer 4

Moves opposite direction to AS

Question 5

when theres a change in lras, does this affect srpc or lrpc

Answer 5

lrpc

Question 6

how is this shown on graph (dont deep too much)

Answer 6

If lras shifts right, lroc shifts left

Question 7

Monetarists view –criticisms overall (7)

Answer 7

Inflation is the only LR consequence of a fiscal stimulus (using increases in G or other components of AD) to reduce unemployment.

It results in a wage price spiral

Workers either suffer initial MONEY ILLUSION or ADAPT expectations based on last year’s inflation expectations (past behaviour)

The solution to controlling inflation is to control the MONEY SUPPLY or use SSP.

SSP controls cost push inflation.

Unemployment is solely a SUPPLY SIDE ISSUE.

The economy will stabilise itself and government intervention is counterproductive.

Question 8

what are adaptive expectations

Answer 8

Consumers adapt to past experiences to adjust their future inflation expectations

They may adjust their pay demands e.g 2% plus the expected rate of inflation experienced from the last increase in demand for labour

Question 9

Monetarists Criticism of the theory

Answer 9

Friedman & Phelps argued that there is not just one Phillips Curve.

There are a number of SR Phillips Curves and a LR Phillips

They argue that in the LR the Phillips Curve is inelastic.

So an increase in AD leads to an increase nominal wages.

This makes employees work more hours and increase output as they feel that real wages have risen.

However, their inflationary (price level) expectations are based on a previous year – THEY are suffering from MONEY ILLUSION!

Question 10

whats money illusion

Answer 10

It is argued that workers believe mistakenly that prices are stable when they are not.

So if a rise in AD causes a increase in nominal wages of 2% due to a shortage in the labour market and greater wage bargaining power the workers feel that they had achieved an increase in purchasing power of 2% if inflation was previously 0%.

But the real wage increase is actually 0%. As the cost rise leads to a price level increase.

However

Over time workers begin to realise that it was just an illusion as so change their behaviour to reduce AD and lower the amount of hours they offer

So output falls back to the previous position and unemployment rises once more with inflation only being a temporary issue.