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?
- Alternating periods of economic expansion and contraction
- Name the four phases of the business cycle in order.
- Expansion, peak, contraction, trough
- Define cyclical unemployment.
- Unemployment that occurs during contractions due to reduced demand for labor
- Define structural unemployment.
- Unemployment from a mismatch between worker skills and available jobs, independent of the cycle
- Define frictional unemployment.
- Unemployment that occurs as workers search for jobs and firms search for workers
- What does the Phillips curve show?
- The inverse relationship between inflation and unemployment in the short run
- Who discovered the Phillips curve relationship and in what year?
- A.W. Phillips, in 1958, using UK labor market data
- What is the slope of the short-run Phillips curve?
- Negative, indicating higher inflation is associated with lower unemployment
- What causes a rightward shift of the Phillips curve?
- An increase in inflation expectations
- What causes a leftward shift of the Phillips curve?
- A decrease in inflation expectations
- In the short run, what tradeoff do policymakers face?
- A tradeoff between inflation and unemployment
- What is the natural rate of unemployment?
- The unemployment rate that exists when the economy is at full employment and inflation is stable
- What does NAIRU stand for?
- Non-Accelerating Inflation Rate of Unemployment
- Describe the shape of the long-run Phillips curve.
- It is vertical at the natural rate of unemployment
- Why is the long-run Phillips curve vertical?
- Because workers and firms adjust inflation expectations to actual inflation, so real wages and employment return to natural levels regardless of inflation