Question

1.   Philips showed that in England between 1861 and 1957 that there was no relation between wage growth and unemployment. You must draw a graph for this question.

2.   After the stagflation of the late 1970’s the Phillips curve relation was modified to have a downward sloping long run Phillips curve and a single upward sloping short run Phillips’s curve. Where they intersected represented equilibrium. This is an example of an “invisible hand” process.   You must draw a graph for this question.

3.   When the unemployment rate is above the natural rate then inflationary expectations fall and we move to lower short run Phillip’s curves. The opposite occurs when we are operating below the natural rate. You must draw a graph for this question.

4.   Excess reserves are at about $2.5 trillion. As soon as banks begin to loan out this money we are going to experience hyperinflation.

5. Graph only. Label Axes, all curves and equilibrium. Explain briefly every curve shift.

A DAD-DAS graph, IS-LM graph, and either an AS-AD graph, or Aggregate Expenditure graph are required.

We are currently operating below NAIRU at full employment. Due to the chaos caused by the tariffs, consumer as well as business confidence wanes and unemployment rises to 6.5%, the government’s built-in stabilizers take effect, and the government uses the appropriate amount of discretionary fiscal policy. The Fed changes its current policy of slowing money growth and returns to a more normal money growth.   

Answer 1

1.

Phillips curve represents the relationship between the rate of inflation and unemployment rate. He conjectured that lower the unemployment rate, higher the labor market and faster firms would increase wages with respect to scarce labor.

The curve is based on the findings of A.W.Phillips in the Relationship between unemployment and the rate of change in money wage in the United Kingdom 1861-1957, found a consistent inverse relationship which was true at least in the short run time period.

2.