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During 2007, the U.S. economy was hit by a price shock when the price of oil increased from around $60 per barrel to around $130 per barrel by June 2008. While inflation increased during the fall of 2007
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During 2007, the U.S. economy was hit by a price shock when the price of oil increased from around $60 per barrel to around $130 per barrel by June 2008. While inflation increased during the fall of 2007 (from around 2.5% to 4.0%), unemployment did not change significantly (it even increased slightly). Explain the relationship between inflation and unemployment in 2007 using the modern Phillips curve concept.

User Axel Donath
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28 votes
28 votes

Answer:

The "old" Phillips curve hasn't been used since the 1980s. Since then it was adapted to show long term relationships between the inflation rate and the unemployment rate. When a upwards price shock in the aggregate supply curve occurs, the whole unemployment curve shifts to he right (upwards) and the new unemployment equilibrium is given by the intersection between the unemployment curve and the long run Phillips curve (vertical line).

Step-by-step explanation:

User Msevgi
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