Question

The Phillips Curve is given by the following equation:

Suppose that the economy begins in long-run equilibrium where the inflation rate is 2%. What will the inflation rate be in two years if the economy experiences a one-time cost shock of 2%?

Answer 1

The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment

In the long run, the inflation rate is determined by the relative values of the economy's rate of money growth and of its rate of economic growth. If the money supply increases more rapidly than the rate of economic growth, inflation is likely to result.

so that the inflation rate will be higher in two years .