a. A rise in the natural rate of unemployment increases short-run and long-run unemployment, shifting the Phillips curves.
b. Lower oil prices reduce short-run inflation and may impact the long-run Phillips curves.
c. Increased government spending boosts short-run output and inflation, potentially impacting the long-run Phillips curves.
d. A decline in expected inflation decreases short-run inflation and may shift the long-run Phillips curves.
Certainly, let's delve into the effects of each of these developments on the short-run (SRPC) and long-run Phillips curves (LRPC):
a. Rise in the Natural Rate of Unemployment:
Short-Run Phillips Curve (SRPC): Initially, a rise in the natural rate of unemployment will lead to a decrease in inflation and a movement up the SRPC due to nominal wage rigidities.
Long-Run Phillips Curve (LRPC): In the long run, as expectations adjust to the higher natural rate of unemployment, the LRPC shifts rightward, reflecting the new equilibrium with the higher unemployment rate.
Economic Reasoning: In the short run, firms might resist cutting nominal wages, leading to a decrease in real wages and increased unemployment. In the long run, as expectations adapt, the relationship between unemployment and inflation returns to the natural rate.
b. Decline in the Price of Imported Oil:
SRPC: A decline in the price of imported oil lowers production costs, leading to increased output and lower prices. This shifts the SRPC to the left, reflecting lower inflation and higher output in the short run.
LRPC: In the long run, the LRPC may or may not shift leftward, depending on whether the effects of lower oil prices persist. If lower prices are perceived as transitory, the LRPC may not shift significantly.
Economic Reasoning: Lower oil prices reduce production costs, increasing firms' profitability and stimulating economic activity in the short run. The long-run impact depends on factors like sustained economic growth and expectations about future oil prices.
c. Rise in Government Spending:
SRPC: An increase in government spending can boost aggregate demand, leading to higher output and prices. This shifts the SRPC to the left in the short run.
LRPC: In the long run, if the rise in government spending is perceived as unsustainable or if it fuels inflation expectations, the LRPC may shift rightward.
Economic Reasoning: Higher government spending stimulates economic activity in the short run, but concerns about fiscal sustainability or inflationary pressures may impact the long-run Phillips curve.
d. Decline in Expected Inflation:
SRPC: A decline in expected inflation leads to lower actual inflation in the short run, shifting the SRPC to the left.
LRPC: In the long run, if the decline in expected inflation becomes the new norm, the LRPC may also shift leftward.
Economic Reasoning: Expectations of future inflation influence current pricing decisions. A decline in expected inflation can lead to lower current inflation rates as firms adjust their behavior and contracts are renegotiated. The long-run Phillips curve reflects the new equilibrium with lower inflation expectations.