Question

Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case.

a. Actual inflation is 5 percent, and expected inflation is 3 percent.

b. Actual inflation is 3 percent, and expected inflation is 5 percent.

c. Actual inflation is 5 percent, and expected inflation is 5 percent.

d. Actual inflation is 3 percent, and expected inflation is 3 percent.

Answer 1

Below is a figure that shows two different short-run Phillips curves depicting these four points. Points a) and d) are seen to be on SRPC1 due to the fact that both have expected inflation 3%. Points b) and c) are seen on SRPC2 due to the fact that both have expected inflation of 5%.

The inflation rate is a macroeconomic indicator that signifies a rise in the overall price level of a basket of goods and services over two distinct time periods, is one that is expressed as a percentage increase.

So, This distinction in expected inflation rates delineates the association between actual inflation, expected inflation, and their respective positions on the short-run Phillips curves.