The Phillips Curve, Unemployment Policy, and the Natural Rate

Question

Using diagrams and text, show and describe for a) the Phillips Curve response to an increase and decrease in inflation and b) the expected Phillips Curve response to a governmental policy that strives to keep unemployment below its natural rate.

Answer 1

Hi,

Using diagrams and text, show and describe for

a) the Phillips Curve response to an increase and decrease in inflation and

1. The Phillips Curve illustrates the relationship between Unemployment(X-Axis) and Inflation(Y-Axis). The curve is downward sloping and indicates that as inflation decreases, unemployment increases and vice versa(as inflation increases, unemployment decreases).

b) the expected Phillips Curve response to a governmental policy that strives to keep unemployment below its natural rate.

1. If a government policy keeps unemployment below its natural rate inflation will rise.