Business cycle theory, the short-run and long-run Phillips curve, and the inflation-unemployment tradeoff at college depth.
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- What is a business cycle?
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Alternating periods of economic expansion and contraction- Name the four phases of the business cycle in order.
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Expansion, peak, contraction, trough- Define cyclical unemployment.
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Unemployment that occurs during contractions due to reduced demand for labor- Who discovered the Phillips curve relationship and in what year?
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A.W. Phillips, in 1958, using UK labor market data- What is the slope of the short-run Phillips curve?
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Negative, indicating higher inflation is associated with lower unemployment- What causes a rightward shift of the Phillips curve?
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An increase in inflation expectations- What causes a leftward shift of the Phillips curve?
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A decrease in inflation expectations- In the short run, what tradeoff do policymakers face?
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A tradeoff between inflation and unemployment- What is the natural rate of unemployment?
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The unemployment rate that exists when the economy is at full employment and inflation is stable- What does NAIRU stand for?
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Non-Accelerating Inflation Rate of Unemployment- Describe the shape of the long-run Phillips curve.
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It is vertical at the natural rate of unemployment- Why is the long-run Phillips curve vertical?
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Because workers and firms adjust inflation expectations to actual inflation, so real wages and employment return to natural levels regardless of inflation- What is the expectations-augmented Phillips curve?
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A version showing that the inflation-unemployment tradeoff exists only when actual inflation differs from expected inflation- What happens to the Phillips curve when expected inflation increases?
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The entire curve shifts upward- Define money neutrality in the long run.
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The idea that changes in money supply affect only nominal variables like inflation, not real variables like unemployment or output
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