ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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rise; rising
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rise; falling
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fall; falling
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fall; rising
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Detailed explanation-1: -Summary: If unemployment is above (below) the natural rate the expectations-augmented Phillips curve implies that inflation is increasing (decreasing). When unemployment equals the natural rate of unemployment (NAIRU), inflation is stable.
Detailed explanation-2: -e ≡ lnPe − lnP−1. This is sometimes called the expectations-augmented Phillips curve.
Detailed explanation-3: -According to the accelerationist Phillips curve, a recession causes inflation to fall lower and lower as long as unemployment exceeds the natural rate. With anchored expectations, a period of high unemployment implies a low level of inflation but not an ever-falling level.
Detailed explanation-4: -As Meltzer (2009: 287) writes, “The long‐run Phillips curve must be vertical because inflation is a nominal variable and unemployment is a real variable.