Question

Consider the accelerationist Phillips Curve. z is 2%,α is 1 , and the unemployment rate is 5%. a) Explain what happens to the Phillips curve if m, the market power of producers, increases from 1% to 2%. You can describe the change either using a graph, or in words

Answer 1

An increase in market power of producers from 1% to 2% shifts the accelerationist Phillips Curve upwards, worsening the tradeoff between unemployment and inflation, leading to higher inflation for a given level of unemployment.

Step-by-step explanation:

When considering the accelerationist Phillips Curve, an increase in m, the market power of producers, from 1% to 2%, generally leads to a shift of the Phillips curve. With z at 2%, α at 1, and the unemployment rate at 5%, an increase in m will likely result in higher inflation for a given level of unemployment. This is because producers with more market power can increase prices, which leads to inflation, without corresponding increases in output and employment. Therefore, the Phillips curve would shift upwards, implying a worse tradeoff between unemployment and inflation than before.