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Author Question: What are price shocks? Why were they not included in the original formulation of the Phillips curve? ... (Read 49 times)

mydiamond

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on: Jun 30, 2018
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?

Question 2

Pay-as-you-go social security
 
  A) can never improve economic welfare for everyone.
  B) can improve welfare for everyone if the population growth rate is large enough.
  C) is always inefficient.
  D) is not used by any countries in the world.


alvinum

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Reply #1 on: Jun 30, 2018
Answer to Question 1

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.

Answer to Question 2

B


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