Answer to Question #100161 in Macroeconomics for Tiffany

Question

b. The Phillips curve relates inflation and unemployment.
(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well, and describe under what conditions the Phillips curve fails to explain economic behavior. Include graphs of the Phillips curve and the AD/AS model in your answer.
Answer:

(ii) In the late 1990s, the U.S. economy experienced a period of extremely low inflation and extremely low unemployment. Use the AD/AS model to explain what sort of change in the economy would cause this. Include a graphical analysis in your answer, and provide two examples of what might bring about this event.
Answer:

Answer 1

b.

i) The Phillips curve states that inflation and unemployment have a stable and inverse relationship.

This inverse relationship between inflation and unemployment could only hold over the short run.

ii) In the long run, if expectations can adapt to changes in inflation rates then the long run Phillips curve resembles and vertical line at the NAIRU; monetary policy simply raises or lowers the inflation rate after market expectations have worked them selves out, like it was in the late 1990s.