The Expectations-Augmented Phillips Curve Is

question 16

Essay

The expectations-augmented Phillips curve is
π = π^e - 3(u - 0.05).
(a)Graph the long-run Phillips curve and the short-run Phillips curve for an expected inflation rate of 0.03.If the Fed chooses to keep the actual inflation rate at 0.03,what will be the unemployment rate? Label the equilibrium point "A".What is the numerical value of the natural rate of unemployment?
(b)An aggregate demand shock (resulting from increased exports of goods)raises the inflation rate to 0.06 (the natural rate of unemployment and the expected inflation rate are not affected).Show what happens on your graph.Label the equilibrium point "B".What is the numerical value of the unemployment rate?
(c)In response to the aggregate demand shock,suppose the Fed allows the inflation rate of 0.06 to persist.Show what happens on your graph,labeling the equilibrium point "C".In the long run,what is the numerical value of the unemployment rate?
(d)From the situation in part (c),suppose a supply shock (an oil price increase)raises the natural rate of unemployment by .01 from its original value.If the expected inflation rate does not change,show what happens in your graph,labeling the equilibrium point "D".

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Definitions:

Unit Costs

The cost incurred by a company to produce, store, and sell one unit of a particular product or service.

Raw Materials Inventory

The stock of unprocessed materials that are used in manufacturing to produce goods, representing a current asset on the balance sheet.

Materials Requisitioned

The process and documentation involved in requesting and withdrawing materials from the inventory for use in production.

Job Order Costing

An accounting method used to assign costs to specific jobs or batches, ideal for manufacturing processes or services that are distinct or custom.