In economics, inflation refers to the sustained increase in the general price level of goods and services in an economy. The Phillips curve can mean one of two conceptually distinct things (which are sometimes confused). Question 1 (1 point) Phillips Curve: Unemployment Rate and Change in Core Inflation Rate, 1.5% 1.0% y = -0.1562x +0.006 R? The long-run Phillips curve is a vertical line at the natural rate of unemployment, but the short-run Phillips curve is roughly L-shaped. Economics--You can edit this template and create your own diagram.Creately diagrams can be exported and added to Word, PPT (powerpoint), Excel, Visio or any other document. … In the diagram’s case study, if unemployment is 6%, then the inflation rate will be valued at 2%. What happens to inflation and unemployment when AD increase? This therefore provides a room to consider the impact of interest rate on different categories of expenses that are usually incurred by the businesses. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate respond both in the short run and in the long run to an unexpected expansionary monetary policy. The Phillips Curve Shows tradeoff between inflation and unemployment. Inflation and Unemployment: Phillips Curve and Rational Expectations Theory! Unemployment takes place when people have no jobs but they are willing to work at the existing wage rates.. Inflation and unemployment are key economic issues of a business cycle. Use PDF export for high quality prints and SVG export for large sharp images or embed your diagrams anywhere with the Creately viewer. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate change both in the short run and in the long run to the announcement of a credible plan of expansionary monetary policy when people have rational expectations. 3 In general, there is an inverse relationship between unemployment and inflation . In the simple Keynesian model of an economy, the aggregate supply curve (with variable price level) is of inverse L-shape, that is, it is a horizontal straight line up to the full-employment … Named for economist A. William Phillips, it indicates that wages tend … First, the Phillips curve may simply refer to a statistical property of the data--for example, what is the correlation between inflation and unemployment (either unconditionally, or controlling for a set of factors)? The Standard Phillips Curve Diagram Economics Essay The topic for this dissertation covers a vast area since it specifically focuses on the effect of interest rate on the business expenses. Phillips curve, graphic representation of the economic relationship between the rate of unemployment (or the rate of change of unemployment) and the rate of change of money wages. On the other hand, Increases in Aggregate Supply cause the Phillips Curve to shift to the left for the exact opposite reasons why Decreases shift it to the right. Phillips Curve: Inflation and Unemployment. The Phillips curve can be better visualized by swapping the inflation rate with the average money wage rate. Refer to the diagram. However, if the unemployment rate drops to 3%, then inflation rises to 5%. Inflation 4 SRPC Short Run Phillips Curve 2% 9% Unemployment 1% 5% In this case, an increase in aggregate supply happens if oil decreases, the minimum wage increases, or if there are any POSITIVE changes in things like technology of supply shock. The inverse relationship shown by the short-run Phillips curve only exists in the short-run; there is no trade-off between inflation and unemployment in the long run. The long-run Phillips Curve is vertical. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a, where the expected and actual rates of inflation are each 6 percent.