inflation and the phillips curve Flashcards
(12 cards)
What is the Phillips curve
It shows the relationship between inflation and unemployment, indicating a short-run trade-off
What does the Taylor rule suggest about monetary policy
It recommends central banks adjust interest rates based on deviations of inflation and output from their target long run equilibrium levels
What is the equation representing the Quantity Theory of Money
( MV = PY ), where M is nominal money supply, V is velocity of money, Y is real output, and P is prices
What happens to the Phillips curve in the long run
It becomes vertical, meaning there is no trade-off between inflation and unemployment
How does a negative supply shock affect the Phillips curve
It causes stagflation—higher inflation and higher unemployment
Why is inflation costly
It distorts price signals, erodes savings, and affects financial intermediation
Why are inflationary expectations important in macroeconomics
They influence wage-setting behaviour, interest rates, and investment decisions, impacting future inflation
Why is central bank credibility important
It helps anchor inflation expectations, making monetary policy more effective in controlling inflation
How does globalization affect inflation
Increased trade and labour mobility can reduce price pressures and weaken the inflation-unemployment trade-off
How does the gig economy impact inflation
It can make wage-setting more flexible, reducing inflation persistence
What are the costs of inflation
It distorts price signals, erodes savings, and affects financial intermediation
What are the consequences of hyperinflation
Severe economic disruption, collapse of purchasing power, and loss of confidence in money
