Y12/Y13 macro diagram illustration and explanations

Question 1

Details on Short-run Phillips curve…

Answer 1

• Draw diagram and label y-axis ‘Inflation(%)’ and label x-axis ‘unemployment (%)’.
• Draw vertical LRPC curve
• Draw the 2 SRPC curves and label ‘B’ on SRPC 1 with 3% at y-axis and u1 on x-axis.
• Label ‘SRPC1’ and ‘x-axis’ A. -> Here. label x-axis ‘Un’.
• Label SRPC2 = LRPC ‘B’

Question 2

Other details on the short-run Phillips curve…

Answer 2

• No matter how SRPC shifts, unemployment will always return to the NRU.
• So, LRPC vertical line from Un.
• At point A, (the NRU), because the inflation rate is 0%, economic agents expect it to stay at 0% + Inflation would rise to 3% if AD and wage demands rose, which would lower NRU.
• At point B, inflation will be expected to stay at 3%, future wage negotiations will be based on inflation being at 3%.
• When shift occurs from B to C, inflation in ‘embedded’, and AD rises from rising inflation.
• NRU + unemployment rate would fall.

Question 3

SRPC points…

Answer 3

• Economist A.W. Phillips used history to find that as inflation falls, unemployment rises.
• So perhaps, the govt. could boost AD by reducing unemployment and vice versa.
• ## Not everyone agrees with this as if inflation rises, people will expect it to remain high and they will change their behaviour accordingly, (adaptive expectations).

Question 4

Details on TUs in a competitive labour market…