Answer to Question #207526 in Macroeconomics for jai

Question

Q) a. What is Phillips curve? Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different. [2 marks]

b. Suppose the economy is in a long-run equilibrium. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the RBI undertakes expansionary/contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? (b) What is sacrifice ratio? [5 marks]

  

Answer 1

(a)Philips curve is an economic concept that state that employment and inflation have stable and inverse relationship.

The curves are different because the long-run curve illustrates that there is no permanent relationship between employment and inflation while short-run curve reflects the inverse relationship between the two variables.

(b) A decrease in aggregate demand will increase prices of goods and services with no change in real production. The phlilips will the shift upwards and to the right as shown in the diagram.