The long run Phillips curve

Overview

Fourteen recall questions on the long run Phillips curve.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What does it mean when the long run Phillips curve shifts position?

   Model answer

   It indicates that the natural rate of unemployment has changed due to alterations in economic conditions or policy interventions.

2. 2

   How do changes to unemployment benefits or minimum wages affect the long run Phillips curve?

   Model answer

   They affect the position of the LRPC by influencing the natural rate of unemployment—for example, higher benefits may shift it rightward by reducing incentives to work.

3. 3

   What role do inflationary expectations play in the long run Phillips curve model?

   Model answer

   They determine where the economy settles after adjustment, as the long run equilibrium depends on expected inflation aligning with actual inflation.

4. 4

   Why is the long run Phillips curve vertical?

   Model answer

   Because when inflationary expectations adjust to match actual inflation, the economy returns to the natural rate of unemployment regardless of the inflation rate.

5. 5

   What happens to the short run Phillips curve when workers and firms expect higher inflation?

   Model answer

   The short run Phillips curve shifts upward as wage demands and price-setting adjust to reflect higher expected inflation.

6. 6

   Explain how higher inflation expectations lead to changes in wage and price behaviour.

   Model answer

   Workers demand higher wages to maintain real incomes, and firms raise prices in anticipation of higher costs, causing the SRPC to shift upward.

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