Question

1. What is the Phillips curve used for?
2. ( How do you use a Phillips curve to illustrate an unexpected change in inflation?
3. If the expected inflation rate increases by 10 percentage points, how do the short-run Phillips curve and the long-run Phillips curve converge?

Answer 1

Ans Philips cuore used to represent the relation between inflation and Unemployment. The Phillips curre States that inflation and unemployment have an enverse relationship. The inverse relationship between enemployment and inflation is depicted as Concave curre, with inflation on yo axis and enemployment on downward sloping, a the x-axis. curre Phillips Inflation rate % 10% 9% 8% Increasing unexpected inflation decreases Unemployment, and Vice-versa. (In figure, point A to B) 7% 6% BR 5% 4% 3% A 2% 5% 3% 4% 5% 6% 7% 8% Unemployment Rate % An increase in expected inflation shifts the shoot-fun Phillips curre upward, so that the actual rate of inflation at one-to-one. any given unemployment rate is higher. The relationship between the changes in expected inflation and changes in actual inflation is When the expected inflation rate increases the actual inflation rate at a given Unemployment rate will increase by the same amount (and vice-versa), The unemployprient rate at which inflation does not Change time is known as the non accelerating inflation

rate of unemployment (NAIRU). most economist believe that there is a hops NAIRU and that there is long- trade-off between unemployment and inflation. The long- san Phillips cuore is vertical because any unemployment rate below the NAIRU leads to ever-acce recelerating inflation. Long-sun Inflation rate (%) Phimses Love (NAIRU) 101 9 7 6 5 4 10% 3 6% 2 12 -3% - Expected inflation rate o 12 2 6 7 3 4 5 There is a different short-un phillles curre Unemployment rate (%) for inflation rate every expected An increase of 10% of expected inflation would shift the short -nun Phillips curre upward which intersect converge with the long- ren Phillips cuore which is stable. rate or