The Phillips Curve - AP Macroeconomics
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Identify the SRPC shift from an adverse supply shock (for example, oil price spike).
Identify the SRPC shift from an adverse supply shock (for example, oil price spike).
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SRPC shifts up (higher inflation at each unemployment rate). Higher costs push inflation up at every unemployment level.
SRPC shifts up (higher inflation at each unemployment rate). Higher costs push inflation up at every unemployment level.
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What are the axes on a standard Phillips curve graph?
What are the axes on a standard Phillips curve graph?
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Vertical: inflation rate; Horizontal: unemployment rate. Inflation on vertical shows price level changes; unemployment on horizontal shows joblessness.
Vertical: inflation rate; Horizontal: unemployment rate. Inflation on vertical shows price level changes; unemployment on horizontal shows joblessness.
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What combination of outcomes is called stagflation on the Phillips curve?
What combination of outcomes is called stagflation on the Phillips curve?
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Higher inflation and higher unemployment. Both rise together, typically from adverse supply shocks.
Higher inflation and higher unemployment. Both rise together, typically from adverse supply shocks.
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Identify the SRPC shift from a favorable supply shock (for example, productivity jump).
Identify the SRPC shift from a favorable supply shock (for example, productivity jump).
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SRPC shifts down (lower inflation at each unemployment rate). Lower costs reduce inflation at every unemployment level.
SRPC shifts down (lower inflation at each unemployment rate). Lower costs reduce inflation at every unemployment level.
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What does the long-run Phillips curve (LRPC) imply about inflation and unemployment?
What does the long-run Phillips curve (LRPC) imply about inflation and unemployment?
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No long-run trade-off; unemployment returns to the natural rate. In the long run, only the natural rate persists regardless of inflation.
No long-run trade-off; unemployment returns to the natural rate. In the long run, only the natural rate persists regardless of inflation.
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What is the shape of the long-run Phillips curve (LRPC)?
What is the shape of the long-run Phillips curve (LRPC)?
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Vertical line at the natural rate of unemployment, $u_n$. Vertical because changing inflation doesn't affect long-run unemployment.
Vertical line at the natural rate of unemployment, $u_n$. Vertical because changing inflation doesn't affect long-run unemployment.
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What is the natural rate of unemployment, $u_n$, in the Phillips curve model?
What is the natural rate of unemployment, $u_n$, in the Phillips curve model?
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Unemployment when the economy is at potential output. This rate includes frictional and structural unemployment only.
Unemployment when the economy is at potential output. This rate includes frictional and structural unemployment only.
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What term describes unemployment at $u_n$ on the LRPC?
What term describes unemployment at $u_n$ on the LRPC?
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Non-accelerating inflation rate of unemployment (NAIRU). At NAIRU, inflation neither accelerates nor decelerates.
Non-accelerating inflation rate of unemployment (NAIRU). At NAIRU, inflation neither accelerates nor decelerates.
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Which factor primarily shifts the short-run Phillips curve: expected inflation or actual inflation?
Which factor primarily shifts the short-run Phillips curve: expected inflation or actual inflation?
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Expected inflation. Expectations drive wage demands, shifting the entire curve.
Expected inflation. Expectations drive wage demands, shifting the entire curve.
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What is a supply shock in the Phillips curve context?
What is a supply shock in the Phillips curve context?
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An event that changes production costs and shifts SRAS and SRPC. Supply shocks affect both price levels and output simultaneously.
An event that changes production costs and shifts SRAS and SRPC. Supply shocks affect both price levels and output simultaneously.
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Identify the direction of the SRPC shift if expected inflation falls.
Identify the direction of the SRPC shift if expected inflation falls.
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SRPC shifts down (and typically to the left). Lower expected inflation allows lower actual inflation at each unemployment level.
SRPC shifts down (and typically to the left). Lower expected inflation allows lower actual inflation at each unemployment level.
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What does the short-run Phillips curve show about inflation and unemployment?
What does the short-run Phillips curve show about inflation and unemployment?
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A short-run inverse relationship between inflation and unemployment. Trade-off exists only temporarily; policies can exploit this in the short run.
A short-run inverse relationship between inflation and unemployment. Trade-off exists only temporarily; policies can exploit this in the short run.
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What does a point right of the LRPC represent in terms of unemployment?
What does a point right of the LRPC represent in terms of unemployment?
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Unemployment above $u_n$. Economy has slack with unemployment exceeding natural rate.
Unemployment above $u_n$. Economy has slack with unemployment exceeding natural rate.
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If expansionary policy lowers unemployment in the short run, what happens to inflation in the short run?
If expansionary policy lowers unemployment in the short run, what happens to inflation in the short run?
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Inflation rises as the economy moves up along the SRPC. Moving left and up along SRPC shows the inflation-unemployment trade-off.
Inflation rises as the economy moves up along the SRPC. Moving left and up along SRPC shows the inflation-unemployment trade-off.
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Identify the policy type most associated with moving along a given SRPC.
Identify the policy type most associated with moving along a given SRPC.
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Demand-side policy (fiscal or monetary) changing aggregate demand. AD shifts cause movements along SRPC, not shifts of the curve.
Demand-side policy (fiscal or monetary) changing aggregate demand. AD shifts cause movements along SRPC, not shifts of the curve.
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If contractionary policy lowers inflation in the short run, what happens to unemployment in the short run?
If contractionary policy lowers inflation in the short run, what happens to unemployment in the short run?
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Unemployment rises as the economy moves down along the SRPC. Moving right and down along SRPC shows the trade-off working in reverse.
Unemployment rises as the economy moves down along the SRPC. Moving right and down along SRPC shows the trade-off working in reverse.
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If unemployment is below $u_n$, what happens to inflation over time as expectations adjust?
If unemployment is below $u_n$, what happens to inflation over time as expectations adjust?
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Inflation tends to rise; SRPC shifts up until unemployment returns to $u_n$. Tight labor markets drive wages and prices up, shifting SRPC upward.
Inflation tends to rise; SRPC shifts up until unemployment returns to $u_n$. Tight labor markets drive wages and prices up, shifting SRPC upward.
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If unemployment is above $u_n$, what happens to inflation over time as expectations adjust?
If unemployment is above $u_n$, what happens to inflation over time as expectations adjust?
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Inflation tends to fall; SRPC shifts down until unemployment returns to $u_n$. Slack labor markets reduce wage pressure, shifting SRPC downward.
Inflation tends to fall; SRPC shifts down until unemployment returns to $u_n$. Slack labor markets reduce wage pressure, shifting SRPC downward.
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What does a point left of the LRPC represent in terms of unemployment?
What does a point left of the LRPC represent in terms of unemployment?
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Unemployment below $u_n$. Economy is overheating with unemployment below natural rate.
Unemployment below $u_n$. Economy is overheating with unemployment below natural rate.
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Identify the direction of the SRPC shift if expected inflation rises.
Identify the direction of the SRPC shift if expected inflation rises.
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SRPC shifts up (and typically to the right). Higher expected inflation requires higher actual inflation at each unemployment level.
SRPC shifts up (and typically to the right). Higher expected inflation requires higher actual inflation at each unemployment level.
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Which direction does the SRPC shift after a favorable supply shock that lowers production costs?
Which direction does the SRPC shift after a favorable supply shock that lowers production costs?
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Rightward (lower inflation at each unemployment rate). Lower costs reduce inflation at every unemployment level.
Rightward (lower inflation at each unemployment rate). Lower costs reduce inflation at every unemployment level.
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What does the short-run Phillips curve (SRPC) show about inflation and unemployment?
What does the short-run Phillips curve (SRPC) show about inflation and unemployment?
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A short-run inverse relationship between inflation and unemployment. As inflation rises, unemployment falls in the short run due to sticky wages.
A short-run inverse relationship between inflation and unemployment. As inflation rises, unemployment falls in the short run due to sticky wages.
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What does the long-run Phillips curve (LRPC) indicate about unemployment in the long run?
What does the long-run Phillips curve (LRPC) indicate about unemployment in the long run?
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Unemployment returns to the natural rate regardless of inflation. In the long run, the economy adjusts and unemployment always returns to $u_n$.
Unemployment returns to the natural rate regardless of inflation. In the long run, the economy adjusts and unemployment always returns to $u_n$.
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What is the typical shape of the LRPC on an inflation-unemployment graph?
What is the typical shape of the LRPC on an inflation-unemployment graph?
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A vertical line at the natural rate of unemployment, $u_n$. Vertical because unemployment is fixed at $u_n$ regardless of inflation level.
A vertical line at the natural rate of unemployment, $u_n$. Vertical because unemployment is fixed at $u_n$ regardless of inflation level.
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What is the natural rate of unemployment, $u_n$, in the Phillips curve model?
What is the natural rate of unemployment, $u_n$, in the Phillips curve model?
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The long-run equilibrium unemployment rate (structural + frictional). Excludes cyclical unemployment; only unavoidable job search and mismatch.
The long-run equilibrium unemployment rate (structural + frictional). Excludes cyclical unemployment; only unavoidable job search and mismatch.
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What is the difference between demand-pull inflation and cost-push inflation on the Phillips curve?
What is the difference between demand-pull inflation and cost-push inflation on the Phillips curve?
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Demand-pull moves along SRPC; cost-push shifts SRPC left/up. Demand-pull: movement along curve; cost-push: entire curve shifts.
Demand-pull moves along SRPC; cost-push shifts SRPC left/up. Demand-pull: movement along curve; cost-push: entire curve shifts.
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Which direction does the SRPC shift after an adverse supply shock that raises production costs?
Which direction does the SRPC shift after an adverse supply shock that raises production costs?
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Leftward (higher inflation at each unemployment rate). Higher costs raise inflation at every unemployment level.
Leftward (higher inflation at each unemployment rate). Higher costs raise inflation at every unemployment level.
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What is expected inflation, $\pi^e$, in the expectations-augmented Phillips curve?
What is expected inflation, $\pi^e$, in the expectations-augmented Phillips curve?
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The inflation rate that workers and firms anticipate. Built into wage contracts and pricing decisions.
The inflation rate that workers and firms anticipate. Built into wage contracts and pricing decisions.
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State the expectations-augmented Phillips curve equation using $\pi$, $\pi^e$, $u$, $u_n$, and $v$.
State the expectations-augmented Phillips curve equation using $\pi$, $\pi^e$, $u$, $u_n$, and $v$.
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$\pi=\pi^e-\beta(u-u_n)+v$. Shows how actual inflation depends on expectations, unemployment gap, and shocks.
$\pi=\pi^e-\beta(u-u_n)+v$. Shows how actual inflation depends on expectations, unemployment gap, and shocks.
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In $\pi=\pi^e-\beta(u-u_n)+v$, what does $v$ represent?
In $\pi=\pi^e-\beta(u-u_n)+v$, what does $v$ represent?
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A supply shock term that shifts the SRPC. Captures oil shocks, productivity changes, or other cost shifts.
A supply shock term that shifts the SRPC. Captures oil shocks, productivity changes, or other cost shifts.
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