Answer to Question #282775 in Macroeconomics for Tenn

Question

 The text notes that changes in oil prices can affect the inflation unemployment outcome. Explain what effect changes in oil prices may have on these two variables.

5. The introduction to this chapter suggests that unemployment fell, and inflation generally fell, through most of the 1990s. What phase (Phillips, stagflation, or recovery) does this represent? Relative to U.S. experience from the 1960s until the 1990s, what was unusual about this?

6. Suppose that declining resource supplies reduce potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

Answer 1

5. As per traditional experience across most developed nations, as inflation rises, unemployment falls. This trade-off is known as the Philips curve.

The above mentioned phase represents a recovery phase, or a weaker trade-off between unemployment and inflation. Here, the Philips curve will shift to the left.

[The opposite of this phase is when both unemployment and inflation rise, which shifts the Philips curve to the right. This happens during stagflation.]

USA has generally witnessed low inflation and moderate unemployment. The unusual thing about the 1960s was that the typical trade-off was not visible.

The trade-off has been visible for most other periods in time.

(In recent years, USA has been able to flatten the Philips curve, by keeping both inflation and unemployment low.)

6. The expansionary monetary policy would be needed.Expansionary monetary policy decreases unemployment because a higher money supply increases business expansions that lead to an increase in the number of jobs in the market.