Chrome File Edit View History Bookmarks Profiles Tab Window Help Q Sat May 7 6:25 PM benefits administration > administrative assistant x Bb Extra Credit Material - 2 x MindTap - Cengage Lea X C Phelps Was Suspicious X Course Hero C ng.cengage.com/staticb/ui/evo/index.html?eISBN=9780357133637&nbld=2822779&snapshotld=2822779&id=1422568014& Update : Jaida CENGAGE | MINDTAP Q Search this course ? ges My Home News Analysis: Is the Phillips Curve a Myth? X Courses Back to Assignment n- 100 Catalog and Study Tools Attempts Average / 3 Rental Options 4. The effects of expectations on inflation A-Z College Success Tips The effect of expectations on the Phillips curve is considered a Phelps's primary contribution. We can use a modified version of the Phillips curve to PM Career Success Tips O illustrate the point that Phelps was trying to make. The key difference is that the position of this new kind of curve changes when the inflation rate RECOMMENDED FOR YOU that people expect changes. When actual inflation changes and expected inflation stays the same, you move along the curve. But when expected inflation changes, the entire curve shifts. Since expectations shift this curve, economists call it an expectations-augmented Phillips curve. The following graph shows a Phillips curve for a hypothetical economy where the natural rate of unemployment is 8%. Initially, the expected inflation oad rate equals the actual inflation rate of 4%. Use the Phillips curve on the graph to answer the questions that follow. Study Hacks Student Tips on Dealing with Consider a scenario where the inflation rate unexpectedly rises from 4% to 5%. Wages rise to match the new level of inflation. Workers believe that Change their wages are rising more quickly than the 4% rate they initially anticipated. As a result, the number of employed workers voluntarily leaving their jobs each month will decline, and the unemployment rate will fall. ponga pdf ? Help Show the effect of the unexpected increase in the inflation rate on the following graph of the Phillips curve. (Hint: To move the curve, select and drag Give Feedback any part of the curve except the point. To move the point, select and drag the point along the curve. If you want to move both, first move the curve and then move the point. The curve and point will snap into position, so if you try to move one and it snaps back to its original position, just try again and drag it a little farther.) A+ iana 8 OChrome File Edit View History Bookmarks Profiles Tab Window Help Q Sat May 7 6:25 PM benefits administration > administrative assistant x Bb Extra Credit Material - 2 X MindTap - Cengage Lea X C Phelps Was Suspicious X Course Hero C ng.cengage.com/staticb/ui/evo/index.html?eISBN=9780357133637&nold=2822779&snapshotld=2822779&id=1422568014& Update : Jaida CENGAGE | MINDTAP Q Search this course ? ges My Home News Analysis: Is the Phillips Curve a Myth? X Courses n- 100 Catalog and Study Tools 00 Rental Options O 7 A-Z College Success Tips Phillips Curve PM 6 Career Success Tips 5 RECOMMENDED FOR YOU INFLATION RATE (Percent) O oad 3 Study Hacks 2 Phillips Curve Student Tips on Dealing with Change pongo pdf ? Help 0 2 6 8 10 12 14 16 UNEMPLOYMENT RATE (Percent) Give Feedback The previous question interpreted the Phillips curve by saying that an unexpected increase in inflation causes a reduction in unemployment below the natural rate. There is another way to interpret this relation. It could be that a reduction in the unemployment rate causes an unexpected increase in A+ inflation. To see how this might happen, imagine that the government unexpectedly increases government spending on weapons production due to the sudden iana outbreak of war. To meet their new obligations to produce more weapons, firms in the defense industry go on a hiring spree. To attract unemployed workers quickly, the defense firms offer wages that are higher than those offered by other firms. To prevent their employees from defecting to defenseChrome File Edit View History Bookmarks Profiles Tab Window Help Q Sat May 7 6:25 PM benefits administration > administrative assistant x Bb Extra Credit Material - 2 x MindTap - Cengage Lea X C Phelps Was Suspicious X *Course Hero C ng.cengage.com/staticb/ui/evo/index.html?eISBN=9780357133637&nold=2822779&snapshotld=2822779&id=1422568014& Update : Jaida CENGAGE | MINDTAP Q Search this course ? ges My Home News Analysis: Is the Phillips Curve a Myth? X Courses industry jobs, the firms in other industries have to increase their wages by more than the expected inflation rate. Since the rising wages drive up firm production costs, they also raise their prices by more than they had planned to. So the increase in wages used to increase employment (and thus n- 100 Catalog and Study Tools decrease unemployment) causes an unexpected increase in the inflation rate. Rental Options On the following graph, show the effect of a reduction in unemployment from 8% to 6% that causes an increase in the actual inflation rate from 4% to A-Z College Success Tips 5%. PM Career Success Tips O RECOMMENDED FOR YOU 8 O oad Study Hacks Phillips Curve Student Tips on Dealing with 6 Change 5 pongo pdf ? 4 Help O Give Feedback 3 2 Phillips Curve A+ 0 2 6 8 10 12 14 16 UNEMPLOYMENT RATE (Percent) ianaChrome File Edit View History Bookmarks Profiles Tab Window Help Q Sat May 7 6:25 PM benefits administration > administrative assistant x Bb Extra Credit Material - 2 x MindTap - Cengage Lea X C Phelps Was Suspicious X Course Hero C ng.cengage.com/staticb/ui/evo/index.html?eISBN=9780357133637&nold=2822779&snapshotld=2822779&id=1422568014& Update : Jaida CENGAGE | MINDTAP Q Search this course ? ges My Home News Analysis: Is the Phillips Curve a Myth? X Courses Phelps emphasized that inflation depends on not only the levels of unemployment, but also how quickly companies and households expected prices n- and wages to rise. That is, the expected inflation rate influences the position of the Phillips curve. If the expected inflation rate changes, the Phillips 100 Catalog and Study Tools curve shifts upward or downward by the amount of the expected increase or decrease in the inflation rate. Rental Options Suppose that the annual inflation rate is initially 4%. Then suppose government spending causes the unemployment rate to fall from 8% to 6%. The A-Z College Success Tips lower unemployment rate causes the economy to move up along a stationary Phillips curve to a new inflation rate of 5%. Next, suppose people begin to expect a higher level of inflation. This causes the Phillips curve to shift upward. As the curve is shifting, the PM Career Success Tips unemployment rate starts to return to the natural rate. It returns to the natural rate because workers now realize that their wages are tracking, not RECOMMENDED FOR YOU exceeding, the actual inflation rate. However, as long as the unemployment rate remains below the natural rate, inflation continues to increase. In the end, the actual inflation rate and the expected inflation rate are 6%, and the unemployment rate returns to the natural rate of 6%. The economy will now stay in this new position, with higher inflation and unemployment equal to the natural rate. oad Study Hacks On the following graph, drag the point along the curve to show the initial reduction in unemployment and increase in inflation. Then drag the curve up Student Tips on Dealing with 1 5 to the right to show the effect of the increase in expected inflation. You should end up with inflation equal to 6% and unemployment equal to 8%. Change bongo pdf ? Help Give Feedback O 7 Phillips Curve 6 A+ 5 3Chrome File Edit View History Bookmarks Profiles Tab Window Help Q Sat May 7 6:25 PM benefits administration > administrative assistant x Bb Extra Credit Material - 2 x MindTap - Cengage Lea X C Phelps Was Suspicious X Course Hero C ng.cengage.com/staticb/ui/evo/index.html?eISBN=9780357133637&nbid=2822779&snapshotld=2822779&id=1422568014& Update : Jaida CENGAGE | MINDTAP Q Search this course ? ges My Home News Analysis: Is the Phillips Curve a Myth? X Courses On the following graph, drag the point along the curve to show the initial reduction in unemployment and increase in inflation. Then drag the curve up n- 100 Catalog and Study Tools to the right to show the effect of the increase in expected inflation. You should end up with inflation equal to 6% and unemployment equal to 8%. Rental Options A-Z College Success Tips PM Career Success Tips O 7 RECOMMENDED FOR YOU Phillips Curve 6 5 oad Study Hacks O Student Tips on Dealing with Change 3 pongo pdf 2 Phillips Curve ? Help 1 Give Feedback 0 2 4 6 8 10 12 14 16 UNEMPLOYMENT RATE (Percent) A+ Grade It Now Save & Continue Continue without saving