Answer to Question #277066 in Macroeconomics for Kay

Question

(b). Will there be any relationship between inflation and unemployment either in the short run or in the

long run in the context of part (a)? What factors account for the different opinions of economists aboutthis relationship?

c) What is price stickiness? Why do New Keynesians believe that allowing for price stickiness in macroeconomic analysis is important?

Answer 1

b) In the short run a decreases in unemployment can lead to increases in inflation, Therefore there is relationship between inflation and unemployment in short run. In the long run, there is no relationship between inflation and unemployment thus they are unrelated.

a) Philips curve

c) Price stickiness is the tendency of prices to adjust only slowly to changes in the economy. Keynesians believe it is important to allow price stickiness so as to explain why monetary policy is not neutral.