Figure 1 shows a short-run Phillips curve and a long-run Phillips curve.

1. Identify the curves and label them. What is the expected inflation rate and what is the natural unemployment rate?

2. If the expected inflation rate increases to 7.5 percent a year, show the new short-run and long-run Phillips curves.

3. If the natural unemployment rate increases to 8 percent, show the new short-run and long-run Phillips curves.

4. If aggregate demand starts to grow more rapidly and the inflation rate eventually hits 10 percent a year, how do unemployment and inflation change?

Transcribed Image Text:

FIGURE 1 Inflation rate (percent per year) 12.5 10.0 7.5- 5.0- 2.5 0 6 8 10 Unemployment rate (percent) 4