An article in the Economist on the Phillips curve stated:After

Question
An article in the Economist on the Phillips curve stated: After the financial crisis unemployment soared to 10%. This [surplus] of workers should have sent inflation tumbling. But prices held up well; in October 2009 when unemployment peaked, underlying inflation was 1.3%, only a little lower than it is today. Some economists explained this by saying that the natural rate of unemployment had gone up in tandem—in other words, that some of the rise in joblessness was permanent. a. Show the effect of an increase in the natural rate of unemployment on both the long-run and short-run Phillips curves. Use your graph to explain how the increase in the natural rate of unemployment lessens the effect of high unemployment on the inflation rate. b. Did the high unemployment rates during and immediately after the recession of 2007–2009 turn out to be permanent? Briefly explain.

Question

An article in the Economist on the Phillips curve stated: After the financial crisis unemployment soared to 10%. This [surplus] of workers should have sent inflation tumbling. But prices held up well; in October 2009 when unemployment peaked, underlying inflation was 1.3%, only a little lower than it is today. Some economists explained this by saying that the natural rate of unemployment had gone up in tandem—in other words, that some of the rise in joblessness was permanent. a. Show the effect of an increase in the natural rate of unemployment on both the long-run and short-run Phillips curves. Use your graph to explain how the increase in the natural rate of unemployment lessens the effect of high unemployment on the inflation rate. b. Did the high unemployment rates during and immediately after the recession of 2007–2009 turn out to be permanent? Briefly explain.

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