All Flashcards
Describe the shape of the SRPC.
Downward sloping, indicating an inverse relationship between inflation and unemployment.
Describe the shape of the LRPC.
Vertical line at the natural rate of unemployment.
On a Phillips Curve graph, what causes a movement along the SRPC?
Changes in Aggregate Demand (AD).
On a Phillips Curve graph, what causes a shift of the SRPC?
Changes in Short-Run Aggregate Supply (SRAS).
What does a point to the right of the LRPC indicate?
Unemployment is above the natural rate.
What does a point to the left of the LRPC indicate?
Unemployment is below the natural rate.
How is the natural rate of unemployment represented on the LRPC?
It's the x-intercept of the LRPC.
How does an increase in expected inflation affect the SRPC?
It shifts the SRPC to the right.
On an AD/AS graph, show a decrease in AD. How does this relate to the SRPC?
AD shifts left, decreasing price level and real GDP. This corresponds to a movement along the SRPC towards lower inflation and higher unemployment.
On an AD/AS graph, show a decrease in SRAS. How does this relate to the SRPC?
SRAS shifts left, increasing price level and decreasing real GDP. This corresponds to a shift of the SRPC to the right, indicating higher inflation and higher unemployment.
Differentiate between movements along the SRPC and shifts of the SRPC.
Movements along are caused by changes in AD; shifts of are caused by changes in SRAS.
Compare the short-run and long-run effects of an increase in the money supply on unemployment.
Short-run: unemployment falls. Long-run: unemployment returns to the natural rate.
Compare the short-run and long-run effects of an increase in the money supply on inflation.
Short-run: inflation increases. Long-run: inflation increases further.
What is the difference between the SRPC and LRPC in terms of policy implications?
SRPC suggests a trade-off policymakers can exploit in the short run. LRPC shows no such trade-off exists in the long run.
Compare the causes of inflation when moving along the SRPC versus shifting the SRPC.
Moving along: caused by increased AD. Shifting: caused by decreased SRAS or increased expected inflation.
Compare the effects of AD and SRAS shifts on inflation and unemployment.
AD increase: inflation up, unemployment down. SRAS decrease: inflation up, unemployment up (stagflation).
Compare the shape and implications of SRAS and LRAS with SRPC and LRPC.
SRAS is upward sloping, SRPC downward sloping, both represent short-run trade-offs. LRAS and LRPC are vertical, showing long-run equilibrium and no trade-offs.
Compare the impact of demand-side vs supply-side policies on the SRPC.
Demand-side: cause movements along the SRPC. Supply-side: cause shifts of the SRPC.
Compare the effect of expansionary monetary policy in the short-run and long-run.
Short-run: decrease unemployment and increase inflation. Long-run: no change in unemployment and increase inflation.
Compare the effect of expansionary fiscal policy in the short-run and long-run.
Short-run: decrease unemployment and increase inflation. Long-run: no change in unemployment and increase inflation.
How does an increase in AD affect the SRPC?
Causes a movement along the SRPC, leading to higher inflation and lower unemployment.
How does a decrease in AD affect the SRPC?
Causes a movement along the SRPC, leading to lower inflation and higher unemployment.
How does an increase in SRAS affect the SRPC?
Causes the SRPC to shift left, leading to lower inflation and lower unemployment.
How does a decrease in SRAS affect the SRPC?
Causes the SRPC to shift right, leading to higher inflation and higher unemployment (stagflation).
What happens to the LRPC if the natural rate of unemployment increases?
The LRPC shifts to the right.
What does the LRPC imply about attempts to lower unemployment below the natural rate?
In the long run, it only leads to higher inflation without a sustained decrease in unemployment.
How does a positive supply shock affect the economy and the Phillips Curve?
SRAS increases, SRPC shifts left, resulting in lower inflation and lower unemployment.
How does a negative supply shock affect the economy and the Phillips Curve?
SRAS decreases, SRPC shifts right, resulting in higher inflation and higher unemployment (stagflation).
If the economy is operating on the LRPC, what is true about unemployment?
The economy is at the natural rate of unemployment.
Explain the relationship between the AD/AS model and the Phillips Curve.
The Phillips Curve is a reflection of the AD/AS model, showing the relationship between inflation (price level changes in AD/AS) and unemployment (related to output in AD/AS).