The Philips Curve

Question 1

What is the inflation/unemployment trade off?

Answer 1

Inflation increase = u/e decreases

Inflation decrease = u/e increase

Question 2

AD/AS to Philips Curve if AD contracts

Answer 2

• AD contracts
• Move down SRAS curve
• Price level falls
• Real output falls
• Unemployment rises

Question 3

AD/AS to Philips Curve if AD expands

Answer 3

• AD expands
• Move up SRAS curve
• Price level rises
• Real output rises
• Unemployment falls

Question 4

Government AD stimulus to correct unemployment

Answer 4

• AD stimulus
• Real output rises
• Inflation rises
• Unemployment falls

Question 5

Theoretical limitations of LRPC (Long Run Philips Curve)

Answer 5

• Changing natural rate of unemployment can only be achieved by very specific SSPs
• Repeated demand side stimulus is unlikely as it will produce hyper inflation
• Economic agents may have rational expectations which might mean there is no SR/LR distinction