Final answer:
An increase in the market power of producers (m) from 1% to 2% shifts the short-run Phillips Curve to the left, representing potentially higher inflation at every unemployment level. This does not affect the natural rate of unemployment and the natural rate of interest in the short run.
Step-by-step explanation:
When considering the accelerationist Phillips Curve, an increase in m, the market power of producers, has significant implications for inflation, unemployment, and interest rates. Specifically:
- If m increases from 1% to 2%, the short-run Phillips Curve would shift to the left since producers would likely raise prices to leverage their increased market power, potentially leading to higher inflation at every level of unemployment.
- The natural rate of unemployment is unlikely to be affected by a change in m in the short run, as it is determined by factors such as market structure, policies, and institutions. However, in the long run, if the increased market power of producers leads to less competition and lower aggregate output, it could increase the natural rate of unemployment by making the labor market less dynamic.
- Similarly, the natural rate of interest may be influenced indirectly. With increased market power, producers may invest less due to higher costs and reduced competition, leading to lower demand for loanable funds, which could decrease the natural rate of interest.
The long-term Phillips Curve, as described by Milton Friedman, indicates that eventually the trade-off between inflation and unemployment disappears and the curve becomes vertical. This long-term outcome suggests there is no permanent impact on the natural rate of unemployment from a change in m. Yet, this does not preclude short to medium-term inflationary pressures and economic adjustments, which could affect the macroeconomic equilibrium and the natural rates.