Phillips Curve drawing worksheet
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Phillips Curve drawing worksheet · problem 1 of 4
Assume the economy of Alta is operating at its natural rate of unemployment with stable inflation. Workers and firms come to expect a higher rate of inflation in the future, and new labor contracts build these expectations into nominal wages. Show the short-run effect of this change on the Phillips curve model, holding all else constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
Phillips Curve drawing worksheet · problem 2 of 4
Assume the economy of Belmore is operating at its natural rate of unemployment with fully anticipated, stable inflation. A widely adopted online job-search platform sharply reduces the time it takes unemployed workers to find positions that match their skills. Show the complete long-run effect of this change in the Phillips curve model, assuming inflation expectations are unchanged.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
Phillips Curve drawing worksheet · problem 3 of 4
Assume the economy of Kesland is operating at its natural rate of unemployment with stable, fully anticipated inflation. A lasting conflict among major oil exporters keeps energy prices sharply and persistently elevated, raising per-unit production costs across Kesland's firms. Assume the structural and frictional determinants of the natural rate are unchanged. Show the short-run effect of this change in the Phillips curve model.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
Phillips Curve drawing worksheet · problem 4 of 4
Assume the economy of Thornwick is operating at its natural rate of unemployment with stable, fully anticipated inflation. Over several years, widespread adoption of industrial automation permanently eliminates the jobs of a large share of manufacturing workers whose skills do not match the openings now available elsewhere in the economy. Assuming inflation expectations are unchanged, show the complete long-run effect of this change in the Phillips curve model.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
Phillips Curve drawing worksheet: answer key
1. New Wage Contracts: srpc shifts right
When expected inflation rises, workers negotiate higher nominal wages, which raises production costs for firms at every level of unemployment. This means that at any given unemployment rate, the actual inflation rate is now higher, so the short-run Phillips curve shifts right (up). The natural rate of unemployment is determined by structural and frictional factors, which are unchanged, so the long-run Phillips curve does not move.
At the natural rate of unemployment the economy now experiences a higher inflation rate, so every short-run unemployment-inflation combination involves more inflation than before.
Watch for: The frequent wrong answer is to shift the LRPC right as well, on the reasoning that higher inflation must eventually worsen unemployment. The natural rate depends only on frictional and structural conditions in the labor market, and a change in what people expect inflation to be leaves job matching and skills exactly as they were.
2. Faster Job Matching: lrpc shifts left; srpc shifts left
Faster job matching reduces frictional unemployment, which lowers the natural rate of unemployment. The long-run Phillips curve is vertical at the natural rate, so it shifts left to the new, lower natural rate. With inflation expectations unchanged, the short-run Phillips curve also shifts left so that it intersects the new long-run Phillips curve at the same expected inflation rate, re-anchoring the entire model at the lower natural rate.
The economy can sustain a permanently lower unemployment rate at an unchanged rate of inflation.
Watch for: Students often move the SRPC on its own and leave the vertical curve where it is, treating easier job search as if it were a fall in expected inflation. Faster matching lowers frictional unemployment, and frictional unemployment is part of the natural rate itself, so the vertical LRPC has to relocate.
3. Persistent Energy Shock: srpc shifts right
Persistently higher energy prices are an adverse supply shock that raises firms' per-unit production costs, so the inflation rate associated with any given unemployment rate rises and the short-run Phillips curve shifts up and to the right. As households and firms come to expect this higher inflation, that expectation is built into nominal wage and price setting, reinforcing the upward shift. The natural rate of unemployment is set by structural and frictional factors, which the prompt holds constant, so the long-run Phillips curve does not move.
At the natural rate of unemployment the economy now faces a higher inflation rate, so every short-run unemployment-inflation combination carries more inflation than before.
Watch for: A common wrong answer is to shift the SRPC left because an oil shock is bad news and students associate bad news with a leftward move. On this graph the horizontal axis is unemployment, so left means less inflation AND less unemployment, which is the opposite of stagflation.
4. Automation Displaces Workers: lrpc shifts right; srpc shifts right
When automation permanently eliminates jobs for workers whose skills no longer match available openings, it raises structural unemployment, which increases the natural rate of unemployment. The long-run Phillips curve is vertical at the natural rate, so it shifts right to the new, higher natural rate. With inflation expectations unchanged, the short-run Phillips curve relocates rightward together with it, so its intersection with the long-run Phillips curve sits at the higher natural rate at the same expected inflation. Because expectations do not change, the SRPC re-centers on the higher natural rate rather than shifting up, and the whole model re-anchors at that rate.
The economy now sustains a permanently higher unemployment rate at an unchanged rate of inflation.
Watch for: Students frequently move only the SRPC, reading 'workers lose their jobs' as a short-run event. Automation that permanently strands workers whose skills no longer fit the openings that remain raises structural unemployment, and structural unemployment is a component of the natural rate, so the vertical curve is what has to move.