Productivity Breakthrough
The question
Assume the economy of Kellingford is operating at its natural rate of unemployment with stable, fully anticipated inflation. Firms across Kellingford adopt a new production process that lets each worker turn out noticeably more per hour, while nominal wages are unchanged. Assume the frictional and structural determinants of the natural rate of unemployment are also 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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Productivity Breakthrough: the worked answer
On the Phillips Curve graph, SRPC shifts down (left).
Why SRPC shifts down (left)
When output per worker-hour rises while nominal wages stay the same, the labor cost built into each unit of output falls, so firms' per-unit production costs decline across the economy. Lower unit costs mean the inflation rate associated with any given unemployment rate is lower, so the short-run Phillips curve shifts down and to the left. Job matching and the skills employers require are untouched, so the vertical long-run Phillips curve stays exactly where it is.
What happens to the equilibrium
At the natural rate of unemployment the economy now experiences a lower inflation rate, so each unemployment rate is paired with less inflation than before.
The mistake students make on this one
The tempting wrong answer is LRPC left, imported from AD-AS where a productivity gain shifts LRAS right. Productive capacity is an AD-AS idea; the LRPC is fixed by how well workers and job openings match, and producing more per hour does not by itself make matching easier.
On exam day
Rising output per hour with nominal wages unchanged is the textbook definition of falling per-unit labor costs, so move the SRPC down and to the left, and do not import the LRAS shift you would draw on the other graph.
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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