Which of the following is the most likely effect of changes in inflation or unemployment on the Phillips Curve? a. A change in the expected inflation causes a shift in both short-run and long-run phillips curves. b. A change in the natural rate of unemployment causes a shift in both short-run and long-run phillips curves. c. A change in the natural rate of unemployment causes a shift in the short-run but not the long-run phillips curve. d. If inflation falls below its expected rate, unemployment falls below its natural rate and there would be a movement up along the short-run Phillips curve. I can narrow it down to b and c…any ideas?
The short-run Phillips curve is constructed holding expected inflation and the natural rate of unemployment constant, and illustrates the negative relationship between unexpected inflation and unemployment. The long-run Phillips curve is vertical at the natural rate of unemployment, which can be affected by the size and makeup of the labor force, changes that affect labor mobility, and advances in technology that replace some jobs and create new ones. The natural rate of unemployment consists of the frictional and structural unemployment that exists when cyclical unemployment is zero and output is at potential (full-employment) GDP. Changes in the natural rate can come from many sources, including the size and makeup of the labor force, changes that affect labor mobility, and advances in technology that replace some jobs and create new ones. An increase (decrease) in the natural rate would be represented as a shift to the right (left) in the long-run Phillips curve. – From the above explanation, you can definitely rule out C. You can also rule out A because a shift in expected inflation only changes the short-run curve, not the long run (natural rate of unemployment stays constant) if inflation falls, unemployment increases (from the negative relationship) so you move down the Phillips curve and unemployment increases with lower inflation. So D is wrong. A change in natural rate of unemployement causes a shift long-run Phillips curve for sure, and might cause a change in expected inflation. So I would go with B
It has to be B. Natural rate of unemployment affects long-term equilibrium -> long-run phillips curve.
Two for B!
Thanks a lot!
What was the answer?
grrr. econ is my nemesis. and i minored in econ in undergrad, go figure.