Question

Using what you know about the Phillips curve, determine whether the following quantities will increase, decrease, or remain the same.

     a. Unemployment in the short run after an increase in inflation:     (Click to select)   Remain the same   Increase   Decrease  .

     b. Unemployment in the long run after an increase in inflation:     (Click to select)   Increase   Decrease   Remain the same  .

     c. Inflation in the short run after a decrease in unemployment:     (Click to select)   Decrease   Remain the same   Increase  .

     d. Inflation in the long run after a decrease in unemployment:     (Click to select)   Increase   Remain the same   Decrease  .

Answer 1

a) Unemployment in the "decrease" after an increase in inflation.

b) Unemployment, in the long run, "remain the same" after an increase in the inflation.

c) INflation in the short run "increase" after an increase in unemployment.

d) Inflation, in the long run, remains the same after a decrease in unemployment.

Philip Curve shows a trade-off between the inflation and the unemployment. The higher the inflation the lower the unemployment and vice versa. Any such, trade-off is absent in the long run where the variable is flexible and adjusts back to the natural level of unemployment.