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Founding the effect of inflation and unemployment in the short run and long run through Phillips curve.

An economy is currently experiencing 3% inflation. Unemployment is 5%, which is believed to be the target rate of unemployment and consistent with potential output. Demonstrate the effect of expansionary policy using the Phillips curve model.

2340_Phillips curve model.jpg

The economy is currently at point A. Point A is consistent with the potential level of output (shown in the AD AS diagram) and 5% level of unemployment rate (shown in the Philips curve diagram.

a. Illustrate what is the short-run effect on unemployment? Inflation? Demonstrate your answer graphically.

b. Illustrate what is the long-run effect on unemployment? Inflation? Demonstrate your answer graphically.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M922634

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