chapter 14.docx - Chapter 14 1 The Phillips curve for the...

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Chapter 14 1. The Phillips curve for the United States in the 1960s becomes very steep after unemployment drops below 4%, and rather shallow as unemployment exceeds 6%. Why is a typical Phillips curve shaped this way? - The typical Phillips curve is shaped that way because it is dealing with the relationship between unemployment and inflation. When unemployment falls inflation rises. In order to reduce inflation policymakers have to accept a small rise in employment. 2. Does the long-run Phillips curve make it difficult (if not impossible) for policymakers to increase output and employment beyond full employment in the long run. - Policy makers would be willing to use expansionary policy to reduce un- employment just like the Phillips curve suggests. These policies assume the inflation expectations will adjust with a noticeable lag allowing some trade between inflation and unemployment. 3. Explain why inflation accelerates if policymakers use monetary and fiscal policy to keep unemployment below the natural rate?

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