Relationship between inflation rate and unemployment rate

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1. Why does the inverse relationship between the inflation rate and the unemployment rate on the Phillips curve hold only in the short run? In the long run, what happens when the actual inflation rate differs from the expected inflation rate?

2. Structural changes in the construction industry and the automobile industry in the mid- to late 2000s, as explained in Chapter 17, may have resulted in a new higher natural rate of unemployment. How would an increase in the natural rate of unemployment affect the short-run Phillips curve? Consider both the unemployment rate version of the Phillips curve and the output gap version of the Phillips curve.

Reference no: EM131302683

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