Question

Suppose that weather around the world is especially good next year, so farmers have unusually good...

Suppose that weather around the world is especially good next year, so farmers have unusually good crops. What might we expect that this will do to the short-run and long-run Phillips curves?

a. This will shift both the short-run and long-run Phillips curves to the right.

b. This will shift both the short-run and long-run Phillips curves to the left.

c. This will shift the short-run Phillips curve to the left, but not affect the long-run Phil-lips curve.

d. This will shift the long-run Phillips curve to the left, but not affect the short-run Phil-lips curve.

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Answer #1

[ANSWER- c. This will shift the short-run Phillips curve to the left, but not affect the long-run Phillips curve.]

The good crop implies an increased supply. This will shift the aggregate supply curve to the right. The price level will in turn fall and output will increase. This will be reflected on the short run Phillips curve in the form of a leftward shift. Whence, the inflation rates are decreasing and employment/output is increasing [unemployment is decreasing]. But this change in prices and output as a result of increased aggregate supply will have no effect on the long-run Phillips curve as it represents the natural rate of unemployment as in the long run the inflation-unemployment relationship depicted by the short-run Phillips curve do not hold.

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