2.8 The Phillips Curve

Question 1

What is meant by the natural rate of unemployment

Answer 1

The unemployment rate when the labour market is at equilibrium

This is the difference between those who are willing to have a job at the current wage level and those who are willing and able to have a job

Question 2

What does the Keynesian long run AS curve look like

Answer 2

Question 3

Explain the Keynesian AS curve

Answer 3

The price level in the economy is fixed until resources are fully employed

Horizontal section shows resources are not fully employed and there is spare capacity

Question 4

Explain this diagram

Answer 4

At the spare capacity section, output can be increased (AD1 to AD2) without affecting price level

Once resources are fully employed and increase in output (AD3 to AD4) will be inflationary and increase price level from P2 to P3

Question 5

Explain the neoclassical AS curve

Answer 5

In the long run output is fixed at each level and all factors of production are fully employed

Changing AD only changes the price level and not National output

Question 6

Explain Unemployment vs Inflation

Answer 6

In the short run there is a trade off between the two

As economic growth increases unemployment falls due to jobs created

This increased wages which increase C and the price level

Question 7

What does the Phillips curve look like

Answer 7

Question 8

What are the implications of the short run and long run Phillips curve for economic policy

Answer 8

If the government tries to lower unemployment in the short run there could be inflationary pressure on PL.

In the short run the economy suffers from demand deficient unemployment which can encourage demand side policies to tackle

In the long run changes in unemployment rate do not affect inflation meaning policies can be more flexible but as there is no demand deficient unemployment then supply side policies are more likely