Question

1. ) How do you use a Phillips curve to illustrate an unexpected change in inflation? please explain it as its 15 mark and ASAP

Answer 1

Phillips curve show the negative relationship between inflation and unemployment in the short run. The curve is downward sloping. As unemployment rises, inflation falls and vice-versa.

An unexpected change in inflation changes the general prices of goods and services in the economy. This change may be caused by changed in the money supply level. A higher money supply leads to inflation and lower money supply leads to deflation.

An unexpected change in inflation always causes either an upward movement or a downward movement along the same Phillips curve.

Let say there is an unexpected increased in the inflation rate. This will raise the domestic aggregate demand in the economy. Consequently, the production level will increase. In the short run, workers and firms are not able to adjust the real wage based on increasing prices. They end up producing more. Therefore, there is an inflationtionary / expansionary gap at which the Actual Output > Potential Output and tends to be overproduction.

So, there will be an upward movement along the Philips curve.

On the other hand, an unexpected fall in the inflation rate raises unemployment rate. There will be a downward movement along the Phillips curve.

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