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When the domestic currency depreciates, which of the following best describes the effect on the short-run Phillips curve?
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20. Tradeoffs Between Inflation and Unemployment
Short Run Phillips Curve
Scelta multipla
In the short run Phillips curve framework, higher rates of unemployment are typically linked with which of the following?
A
Higher inflation (or a higher rate of wage growth)
B
Higher potential output due to increased labor supply
C
No systematic relationship with inflation because the short run Phillips curve is vertical
D
Lower inflation (or a lower rate of wage growth)
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Recall the definition of the short-run Phillips curve, which shows the inverse relationship between unemployment and inflation (or wage growth) in the short run.
Understand that when unemployment is higher than the natural rate, there is less pressure on wages and prices, leading to lower inflation or slower wage growth.
Recognize that the short-run Phillips curve is downward sloping, meaning higher unemployment corresponds to lower inflation, not higher inflation.
Note that the short-run Phillips curve is not vertical; it only becomes vertical in the long run when inflation expectations adjust.
Conclude that higher unemployment rates are typically linked with lower inflation or lower wage growth in the short-run Phillips curve framework.
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