# the phillips curve graphs the relationship between which two variables?

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## Chapter 31: Monetary Policy

Start studying Chapter 31: Monetary Policy - ECON200. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

## Chapter 31: Monetary Policy - ECON200

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The Phillips curve graphs the relationship between which two variables?

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the unemployment rate

the inflation rate

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In which sequence will events occur when the economy adjusts to an expansionary monetary policy, in the short run and then in the long run?

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the Fed, increase, sticky, produce, in the long run

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### Textbook solutions for this set

Principles of Economics

8th Edition N. Gregory Mankiw 820 explanations

Krugman's Economics for AP*

2nd Edition

David Anderson, Margaret Ray

1,042 explanations

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### Terms in this set (20)

The Phillips curve graphs the relationship between which two variables?

the unemployment rate

the inflation rate

In which sequence will events occur when the economy adjusts to an expansionary monetary policy, in the short run and then in the long run?

the Fed, increase, sticky, produce, in the long run

Suppose you own a small business and have been thinking about expanding production, including hiring more workers. Until recently, interest rates at your bank have been too high for you to obtain a loan. However, the central bank decides to expand the money supply, which lowers interest rates to a level where you can take out a loan and expand production. Select the ways in which your actions affect the macroeconomy.

Aggregate demand increases.

Unemployment goes down.

Investment increases.

Real GDP increases.

Which of the following is true in the long run, as depicted in the figure showing the effects of an expansionary monetary policy?

Real GDP returns to its original level.

Unemployment returns to its original level.

The more predictable policy decisions by the Federal Reserve are, the more effective they are.

False

Suppose that the nation of Rationalia experiences the inflation rates shown from 2013 through 2015. If the Rationalian citizenry behaves according to the rational expectations theory, what will they expect the inflation rate to be in 2016?

8%

Which of the following is true in the long run, following a deliberate expansion of the money supply?

Real GDP returns to its original level.

The stimulating effects of the policy action wear off.

Unemployment returns to its original level.

The figure depicts the short-term effects of a contractionary monetary policy. Apply the labels to show how each element in the economy is affected.

goes down

- quantity of investment demand

- supply of loanable funds

- price level - economic output goes up - interest rate - unemployment

This figure illustrates what happens when the Federal Reserve buys a large amount of Treasury bonds. Place the following events in order.

The Fed With increase Price across Real impact

The traditional short-run Phillips curve implies a powerful role for monetary policy. According to the theory, place the events in order based on what happens when the central bank unexpectedly expands the money supply.

the economic the central bank aggerate the inflation

Suppose that the nation of Adaptistan experiences the inflation rates shown from 2013 through 2015. If the Adaptistanian citizenry behaves according to the adaptive expectations theory, what will they expect the inflation rate to be in 2016?

Adaptive expectations theory assumes that inflation will remain at the last known level.3%

Place in order the events that occur in the short run when the Federal Reserve enacts expansionary monetary policy.

As the Fed, market, the increased, the aggerate

Each dot on the figure below represents a year between 1948 and 2015. Place each label on the area of the graph where you would expect to find the most dots for those years.

6-10 : the 1970s the Great Recession 2-5: 1960 bottom

Fill in the blanks to complete the passage about monetary neutrality.

Monetary neutrality is the idea that money is neutral in the (blank). . It is a means of exchanging, tracking, and storing value, but is not a (blank) of value. An economy does not become inherently more or less (blank) by virtue of a change in the amount of money in circulation. Real productivity depends on resources, technology, and (blank).

long run, source, productive, institutions

Suppose that in the nation of Adaptistan, the inflation rate is highly variable. Three years' worth of inflation rates are shown in the table.

Assuming adaptive expectations, the public expected 4% inflation in year 4. This is 6% lower than the actual inflation rate of 10%.the answer is 6%

Does each statement about inflation listed below have to do with adaptive expectations theory or rational expectations theory? Drag the correct label to each statement.

adaptive theory

- Next year is expected to be like this year

- People underestimate inflation when inflation is accelerating.

## The Phillips curve model (article)

Every graph used in AP Macroeconomics

## The Phillips curve model

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Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the Phillips curve model, including:

what it’s used to illustrate

key elements of the model

some examples of questions that can be answered using that model.

## What the Phillips curve model illustrates

The Phillips curve illustrates that there is an inverse relationship between unemployment and inflation in the short run, but not the long run. The economy is always operating somewhere on the short-run Phillips curve (SRPC) because the SRPC represents different combinations of inflation and unemployment. Movements along the SRPC correspond to shifts in aggregate demand, while shifts of the entire SRPC correspond to shifts of the SRAS (short-run aggregate supply) curve.

The long-run Phillips curve is vertical at the natural rate of unemployment. Shifts of the long-run Phillips curve occur if there is a change in the natural rate of unemployment.

## Key Features of the Phillips curve model

A vertical axis labeled “inflation rate” or “

\text{inf}. \% inf.%

start text, i, n, f, end text, point, percent

” and a horizontal axis labeled “unemployment rate” or “

UR\% UR% U, R, percent ” inf.\% inf.% UR\% UR%

\text{Inflation rate}

Inflation rate

\text{on vertical axis}

on vertical axis

\text{Unemployment rate}

Unemployment rate

\text{on horizontal axis}

on horizontal axis

A vertical curve labeled LRPC that is vertical at the natural rate of unemployment.

inf.\% inf.% UR\% UR%

\text{Vertical LRPC}

Vertical LRPC

\text{At the natural rate}

At the natural rate

\text{of unemployment}

of unemployment NRU NRU LRPC LRPC

A downward sloping curve labeled SRPC

inf.\% inf.% UR\% UR%

\text{Downward sloping}

Downward sloping \text{SRPC curve} SRPC curve NRU NRU LRPC LRPC SRPC SRPC

## Helpful reminders for the Phillips curve model

Make sure to incorporate any information given in a question into your model. For example, if you are given specific values of unemployment and inflation, use those in your model.

## Common uses of the Phillips curve model

### Showing a recession

During a recession, the current rate of unemployment (

UR_1 UR 1

U, R, start subscript, 1, end subscript

) is higher than the natural rate of unemployment (

NRU NRU N, R, U

). Therefore, a point representing a recession in the Phillips curve model (A) will be on the short-run Phillips curve (SRPC) to the right of the long-run Phillips curve (LRPC), as shown in this graph:

inf.\% inf.% UR\% UR% A A NRU NRU LRPC LRPC UR_1 UR 1 \inf_1 inf 1 SRPC SRPC

## Showing adjusting expectations

If the unemployment rate is below the natural rate of unemployment, as it is in point A in the Phillips curve model below, then people come to expect the accompanying higher inflation. As a result of higher expected inflation, the SRPC will shift to the right:

inf.\% inf.% UR\% UR% A A B B NRU NRU =UR_2 =UR 2 LRPC LRPC UR_1 UR 1 inf_1 inf 1 SRPC_2 SRPC 2 SRPC_1 SRPC 1

## An example of the Phillips curve model in the AP macroeconomics exam

Here is an example of how the Phillips curve model was used in the 2017 AP Macroeconomics exam.

[Click here to compare your answer to the correct answer]

[Attribution of question and solution]

## Every graph used in AP Macroeconomics

The production possibilities curve model

The market model

The money market model

The aggregate demand-aggregate supply (AD-AS) model

The market for loanable funds model

The Phillips curve model

This is the currently selected item.

The foreign exchange market model

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## Want to join the conversation?

Log in Xin Hwei Lim 3 years ago

Posted 3 years ago. Direct link to Xin Hwei Lim's post “Should the Phillips Curve...”

Should the Phillips Curve be depicted as straight or concave? Because in some textbooks, the Phillips curve is concave inwards. Does it matter?

• melanie 3 years ago

Posted 3 years ago. Direct link to melanie's post “It doesn't matter as long...”

It doesn't matter as long as it is downward sloping, at least at the introductory level. We can leave arguments for how elastic the Short-run Phillips curve is for a more advanced course :)

Zack 2 years ago

Posted 2 years ago. Direct link to Zack's post “For adjusted expectations...”

For adjusted expectations, it says that a low UR makes people expect higher inflation, which will shift the SRPC to the right, which would also mean the SRAS shifted to the left. Why does expecting higher inflation lower supply?

Guys, does anyone know the answer?