Global Commodity Glut
The question
Assume the economy of Halstead is operating at its natural rate of unemployment with stable, fully anticipated inflation. Record harvests worldwide and abundant crude from newly opened oil fields abroad sharply reduce the prices of the food and fuel that Halstead's firms buy as inputs. Assume the frictional and structural determinants of the natural rate of unemployment are unchanged. Show the short-run effect of this change in the Phillips curve model. Show the effect on the Phillips Curve graph.
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Global Commodity Glut: the worked answer
On the Phillips Curve graph, SRPC shifts down (left).
Why SRPC shifts down (left)
Cheaper food and fuel lower firms' per-unit production costs throughout the economy, which is a favorable supply shock. At any given unemployment rate firms need to raise their prices less quickly, so the inflation rate paired with each unemployment rate falls and the short-run Phillips curve shifts down and to the left. The prompt holds the frictional and structural determinants of the natural rate constant, so the vertical long-run Phillips curve does not move.
What happens to the equilibrium
At the natural rate of unemployment the economy now experiences a lower inflation rate, so every short-run unemployment-inflation pairing carries less inflation than before.
The mistake students make on this one
Students often push the SRPC right because cheap inputs sound like good news and rightward feels like growth. The horizontal axis here is unemployment, not real GDP, so right means MORE unemployment at every inflation rate, and a favorable supply shock belongs in the lower left.
On exam day
Say the axes out loud before you draw: unemployment across, inflation up. Falling input prices move the SRPC down and to the left, the exact mirror of the direction you drew for the oil shock.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when SRPC shifts down (left) 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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