If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent?
Illustrate your answer with a Phillips curve.
If the rate of inflation is constant at 5 percent per year, then the price level is rising, but the unemployment rate should remain constant, as shown in the graph below (as long as inflation is at 5 percent, the unemployment rate does not change). If inflation is 0 percent, then the Phillips curve would predict that unemployment will be higher than it was when inflation was 5 percent (assuming no change in inflation expectations), but as long as inflation is constant at 5 percent, there will be no change in the unemployment rate.
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