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3.

6 HW
The Phillips Curve
Due: GOLD – Wednesday 2/28, BLUE – Thursday 3/1
Directions: Read the following introduction and then click on the video link for the Phillip’s Curve. Work
through this document while watching the video.

Introduction
The Short and Long Run Phillips Curves are a “partner graph” to AD/SRAS/LRAS, meaning that we can
draw a Phillips Curve using only information shown in an AD/SRAS/LRAS graph and, in fact, the Phillips
Curve is a mirror image of AD/SRAS/LRAS graph. More specifically, the Short-Run Phillips Curve is a
mirror image of the Short-Run Aggregate Supply Curve and the Long-Run Phillips Curve is a mirror image
of the Long-Run Aggregate Supply Curve.

Click on this link and complete the prompts below:


https://www.educreations.com/lesson/view/phillips-curve/37677840/?s=CbbIS0

Short-Run Phillips Curve


Short-run Phillips curve (SRPC) shows inverse relationship between inflation and unemployment,
holding the expected inflation rate and natural rate of unemployment constant.

Part A – Shifts of Aggregate Demand cause movement along the SRPC. An increase in Aggregate
Demand will cause the point on the SRPC to move up and left, indicating an increase in the inflation rate and
a decrease in the unemployment rate. A decrease in Aggregate Demand will cause the point on the SRPC to
move down and right, indicating an increase in the unemployment rate and a decrease in the inflation rate.

1. Draw an AD/SRAS/LRAS graph at 3. Draw a Short-Run Phillips Curve marking


equilibrium at full employment level of current full employment equilibrium point
output. “A” and labeling it with u1 and π1.

2. Show the effects of Demand-Pull 4. Show the effects of Demand-Pull Inflation


Inflation on the AD/SRAS/LRAS graph. on the Phillips Curve. Label the new point,
“B” and labeling it with u2 and π2.

What happens to PL?

Inflation?

Output?

Unemployment?
3.6 HW
5. Draw an AD/SRAS/LRAS graph at 7. Draw a Short-Run Phillips Curve marking
equilibrium at full employment level current full employment equilibrium point
of output. “A” and labeling it with u1 and π1.

6. Show the effects of a decrease in 8. Show the effects of the decrease in


Aggregate Demand on the Aggregate Demand on the Phillips Curve.
AD/SRAS/LRAS graph. Label the new point, “B” and labeling it
with u2 and π2.

What happens to PL?

Inflation?

Output?

Unemployment?

Part B – Shifts of Short-Run Aggregate Supply cause mirror image shifts of the SRPC. Negative AS
shocks, which shift the SRAS leftward, will shift the short-run Phillips curve to the right, resulting in both
higher rates of inflation and higher rates of unemployment. An increase in inflationary expectations will
also shift the SRPC curve to the right. Positive AS shocks, which shift the SRAS rightward, will shift the short-
run Phillips curve to the left, resulting in both lower rates of inflation and lower rates of unemployment. A
decrease in inflationary expectations will do the same thing.

1. Draw an AD/SRAS/LRAS graph at 3. Draw a Short-Run Phillips Curve


equilibrium at full employment marking current full employment
level of output. equilibrium point “A” and labeling it
with u1 and π1.
2. Show the impact if OPEC cuts
production of oil on the 4. Show the effects of Demand-Pull
AD/SRAS/LRAS graph. Inflation on the Phillips Curve. Label
the new curve SRPC2 and the new
point, “B” and u2 and π2.

What happens to PL?

Inflation?

Output?

Unemployment?

Part C - Practice
3.6 HW

1. Draw an AD/SRAS/LRAS graph at 3. Draw a Short-Run Phillips Curve


equilibrium at full employment marking current full employment
level of output. equilibrium point “A” and labeling it
with u1 and π1.
2. Show the impact if interest rates
fall on the AD/SRAS/LRAS graph. 4. Show the impact if interest rates
fall on the Phillips Curve. Label the
new point, “B” and u2 and π2. If there
is a new curve, label it SRPC2.

What happens to PL?

Inflation?

Output?

Unemployment?

5. Draw an AD/SRAS/LRAS graph at 7. Draw a Short-Run Phillips Curve


equilibrium at full employment marking current full employment
level of output. equilibrium point “A” and labeling it
with u1 and π1.
6. Show the impact of negative
supply shock on the 8. Show the impact of negative supply
AD/SRAS/LRAS graph. shock on the Phillips Curve. Label
the new point, “B” and u2 and π2. If
there is a new curve, label it SRPC2.

What happens to PL?

Inflation?

Output?

Unemployment?

Long-Run Phillips Curve


3.6 HW
The Long-Run Phillips Curve (LRPC) shows the relationship between unemployment and inflation after
expectations of inflation have had time to adjust. The LRPC is a vertical line at the natural rate of
unemployment (NRU or NAIRU).

Part A – Manipulating the graph and making long-run adjustments

1. Draw an AD/SRAS/LRAS graph at 3. Draw a Short and Long-Run Phillips Curve


equilibrium at full employment level of marking current full employment
output. equilibrium point “A” and labeling it with
NRU and π1.
2. Show the effects of a stock market
boom on the AD/SRAS/LRAS graph. 4. Show the effects of stock market boom on
the Phillips Curve. Label the new point, “B”
and labeling it with u2 and π2.

5. Inflationary or recessionary gap? 6. Inflationary or recessionary gap?

7. Show the long run corrections on the 8. Show the long run corrections on the
AD/SRAS/LRAS graph. Phillips Curve.

What happens to PL?

Inflation?

Output?

Unemployment?

Part B – What shifts the LRPC?


LRPC will shift if the NRU shifts.

For each of the following, note whether it will cause an increase or decrease in unemployment.
1.
LRPC Shifter Impact on Unemployment
Changes in government policies

a. Higher or longer-lasting unemployment


insurance (unemployment compensation)
b. Higher minimum wage

c. Subsidies to workers or employers

d. Government prohibition against layoffs

Changes in labor force characteristics


3.6 HW

Changes in productivity – productivity gains


without wage increase make workers more
desirable
Changes in labor market institutions

a. power of labor unions

b. temp agencies

c. internet job searches