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Exercise: Phillips curve

  • Using our previous exercise, assume that the U.S government is planning on increasing its budget in order to update public infractures, shows this effect on the short term and long term Philips curve.
    • Short term: since we know that the variable G will go up, and we can also safely assume that the C will also increase, the aggregate demand curve must shift to the right. This implies that there will be inflation accompanied with lower unemployment level.
    • Long term: new public infractures implies cheaper transportation cost and more human capital. On the short term model, we can see that the Phillips curve shifts to the left, since the SRAS will shift to the right. 
    • This increase in human capital (via new schools) will also shift the long term Philips curve to the left, implying that the natural rate of unemployment is now lower.

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Location: Boston, MA, USA

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