Question

So let's say that this European Central Bank, the European Central Bank expects the natural unemployment rate to be 6 percent, and the actual unemployment rate is 5.5 percent.

B.) Assuming the expectation is the actual natural unemployment rate (5.5%), then if the government decides to increase government spending, please briefly explain and use the Phillips curve to illustrate.

Answer 1

Unemployment falls when more people are hired. Furthermore, the price level rises, causing inflation to rise. From points A to D, these two components are represented as comparable motions along the Phillips curve. There is a corresponding inflation rate and unemployment rate represented by point A on the Phillips curve at the initial equilibrium point A in the aggregate demand and supply graph.