Economics and Statistics

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.

Short run Phillips curve: it represents a trade off between the level of inflation and the level of unemployment in the economy. Any change in the AD curve will produce a negative relationship between the inflation rate and unemployment rate. For example, an expansionary demand side policy will decrease the level of unemployment but increase the inflation rate (in the short run) and vice versa.  The inverse relationship between inflation and unemployment implies that the Phillips curve is downward slopping. It also shows that deflation is related to high unemployment, think about the AD curve shifting to the left.  A shift in AD is just a movement along the Phillips curve. When the SRAS shifts, the Phillips curve shifts in the opposite direction. Long run Phillips curve: the curve is inelastic, implying that there is no trade off between inflation and employment. Shift in SRAS to the right, the AD curve will shift to the left to reach, once again, LRAS. The impact on the short...