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Phillips Curve Flashcards

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  1. The long-run Phillips Curve (LRPC) is typically depicted as:

    Answer: A vertical line at the natural rate of unemployment

    The LRPC is vertical at the natural rate of unemployment because in the long run, inflation expectations fully adjust and there is no lasting trade-off between inflation and unemployment.

  2. What causes the short-run Phillips Curve to shift to the right (outward)?

    Answer: An increase in expected inflation or a negative supply shock

    Higher inflation expectations or negative supply shocks shift the SRPC rightward, producing higher inflation at every unemployment rate.

  3. According to the adaptive expectations hypothesis, workers and firms form inflation expectations based on:

    Answer: Past inflation experience

    Adaptive expectations means economic agents expect future inflation to resemble past inflation, gradually updating their expectations as new data arrives.

  4. If the central bank unexpectedly expands the money supply, the short-run effect on the Phillips Curve would be:

    Answer: Movement up and to the left along the SRPC (lower unemployment, higher inflation)

    Unexpected monetary expansion boosts aggregate demand, reducing unemployment and raising inflation — a movement up and to the left along the existing SRPC.

  5. In the long run, if a central bank repeatedly tries to hold unemployment below the natural rate, the result will be:

    Answer: Accelerating inflation with unemployment eventually returning to the natural rate

    Sustained attempts to push unemployment below the natural rate cause inflation expectations to ratchet upward, shifting the SRPC up repeatedly and resulting in accelerating inflation.

  6. A negative supply shock, such as a sudden large increase in oil prices, would most directly cause:

    Answer: A rightward shift of the SRPC

    A negative supply shock raises production costs, increasing inflation at every unemployment rate and shifting the SRPC to the right — the stagflation scenario.

  7. Which policy outcome correctly describes a movement along (rather than a shift of) the short-run Phillips Curve?

    Answer: Contractionary monetary policy moves the economy to lower inflation and higher unemployment on the same SRPC

    Contractionary monetary policy reduces aggregate demand, moving the economy along the existing SRPC to a point with lower inflation and higher unemployment.