Suppose the natural rate of unemployment is 6 percent. On...

Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case. a. Actual inflation is 5 percent, and expected inflation is 3 percent. b. Actual inflation is 3 percent, and expected inflation is 5 percent. c. Actual inflation is 5 percent, and expected inflation is 5 percent. d. Actual inflation is 3 percent, and expected inflation is 3 percent.

Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case.
a. Actual inflation is 5 percent, and expected inflation is 3 percent.
b. Actual inflation is 3 percent, and expected inflation is 5 percent.
c. Actual inflation is 5 percent, and expected inflation is 5 percent.
d. Actual inflation is 3 percent, and expected inflation is 3 percent.

Key Concepts

Phillips Curve

The Phillips Curve is an economic model that illustrates the inverse relationship between inflation and unemployment. In the short run, higher inflation is associated with lower unemployment and vice versa, reflecting the trade-off policymakers might face. However, this relationship can change over time depending on expectations and structural factors in the economy.

Natural Rate of Unemployment

This is the level of unemployment that an economy naturally experiences when it is at full capacity, accounting for frictional and structural factors. It represents the baseline rate around which actual unemployment fluctuates due to short-run economic shocks and policy interventions.

Inflation Expectations

Inflation expectations refer to the rate of inflation that individuals, businesses, and policymakers predict will occur in the future. These expectations are crucial because they can influence actual inflation outcomes; for instance, if people expect higher inflation, they may act in ways that bring about higher current inflation.

Short-Run vs Long-Run Trade-Off

In the short run, there is often a trade-off between unemployment and inflation as depicted by the Phillips Curve. However, in the long run, inflation expectations adjust to actual inflation, neutralizing the trade-off. This means that attempts to reduce unemployment below its natural rate typically lead to accelerating inflation without providing sustained benefits in employment levels.

Transcript

0:00 All right, guys.

00:01 Today we begin chapter 35 with question one, and we're being asked to suppose that the natural rate of unemployment in 6% on one graph we need to draw to phillips curves that described the four situation.

00:14 Listen a bit low before we begin, i've written down here the equation standard equation for the short run phillips curve that describes and negative trade off between the negative short run trade off between unemployment and inflation.

00:29 Here, i didn't know it.

00:30 Unemployment with you, uh, the natural level of unemployment with you star.

00:34 Hi.

00:35 The greek letter pi is the notes right on inflation and pi e is the expect three of inflation.

00:41 So the shoulder and philip's curve tells us that unemployment is equal to the natural rate of unemployment, minus some difference between the actual inflation, the expected inflation.

00:53 The private elephant described the slopes with this level of philip skirt.

00:58 All right, so what we know from this equation is that when actual inflation pie and expected inflation, piety are equal, then the unemployment level would be equal to the natural level unemployment.

01:09 And this implies that the shoulder and phillips curve will intersect that longer and philip's curve, which is always vertical at the expected rate of inflation.

01:20 So, for example, if we need to join charlotte phillips curve with them, that is consistent with an expected rate of inflation able to three.

01:27 We will draw this s r p c one, which intersex become longer, and phillips curb a 3%.

01:36 And likewise, he would want to do the same for ah, a short on philip's curve that is consistent with an expected rate of inflation...

Please give Ace some feedback