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Chapter 12: Q.5 (page 312)

How would a decrease in energy prices affect the Phillips curve?

Short Answer

Expert verified

The Phillips curve would be shifted lower towards its origin. As a result, unemployment and inflation will be reduced.

Step by step solution

01

Introduction

The Phillips curve, named after William Phillips, is a single-equation economic model that hypothesizes an inverse relationship between rates of unemployment and corresponding rates of pay increases within an economy. The Philips curve depicts the employment-inflation rate tradeoff.

02

Explanation

As the price of energy falls, this is a positive supply shock to the economy. This will increase aggregate supply, causing the AS curve to shift to the right. It will result in a decrease in the price level and a rise in real GDP. The Phillips curve would be shifted lower towards its origin. As a result, unemployment and inflation will be reduced.

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