Longer Jobless Benefits
The question
Assume the economy of Rensdale is operating at its natural rate of unemployment with stable, fully anticipated inflation. Rensdale's legislature extends the period during which laid-off workers may collect unemployment benefits from three months to two years, and jobless workers respond by turning down early offers and searching far longer before accepting a position. Firms' per-unit production costs and the inflation rate that workers and firms expect are both unchanged. Show the long-run effect of this change in the Phillips curve model. Show the effect on the Phillips Curve graph.
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Longer Jobless Benefits: the worked answer
On the Phillips Curve graph, LRPC shifts right.
Why LRPC shifts right
Longer benefit eligibility lowers the cost of continuing to search, so unemployed workers spend more time between jobs and frictional unemployment rises. Frictional unemployment is one of the components of the natural rate, so the natural rate of unemployment is now higher and the long-run Phillips curve, the vertical line drawn at that rate, moves to the right. Because per-unit costs and expected inflation are both unchanged, the short-run curve simply travels with the natural rate at the same expected inflation rather than shifting relative to it.
What happens to the equilibrium
The economy now settles at a permanently higher unemployment rate while the inflation rate it can sustain is unchanged.
The mistake students make on this one
The most common error is to move the SRPC up and to the right, reading 'unemployment goes up' as something that has to happen at a given inflation rate. Nothing here changed firms' costs or expected inflation; what changed is how long the unemployed search, which is frictional unemployment and therefore part of the natural rate itself.
On exam day
Sort every labor-market policy with one question: does it change how quickly the unemployed accept jobs, or does it change costs and expected inflation? Search behavior moves the vertical LRPC; costs and expectations move the SRPC.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when LRPC shifts right and every other curve on the Phillips Curve graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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