What are price shocks? Why were they not included in the original formulation of the Phillips curve? Why were they added to the modern Phillips curve?
What will be an ideal response?
In the Phillips curve, inflation is determined by expected inflation and the unemployment gap. A price shock is anything other than those two factors that has an impact on inflation, such as a change in import prices. At first, Phillips and other economists were interested in the relationship between unemployment and inflation, rather than in devising a comprehensive explanation addressing all causes of inflation. Once it became clear that a persistent unemployment gap will cause inflation to change repeatedly (shifts of the short-run Phillips curve), it was possible to ask how much of inflation is attributable to labor market conditions, which requires recognition of all other factors that influence inflation.
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Which of the following would tend to increase the natural unemployment rate?
a. The creation of national unemployment offices to increase the information about job openings b. Recessionary downturns in the economy that result in massive layoffs of auto workers c. Sociological changes that encourage people to seek employment d. The creation of government subsidies for workers who relocate into areas where new jobs can be found e. Less government money made available as unemployment compensation
The net value to the federal government of the bonds currently held in the Social Security Trust Fund is
a. approximately $1 trillion. b. now approaching $2 trillion. c. greater than $2.5 trillion. d. zero, because the federal government is both the payee and recipient of the interest and principal represented by these bonds.