Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. Demonstrate your answer by explaining Philips Curve.

Phillips curve-a curve that shows the short-run tradeoff between inflation and unemployment.

The Phillips curve remains a controversial topic among economists, but most economists today accept the idea that there is a short-run tradeoff between inflation and unemployment. This simply means that, over a period of a year or two,

many economic policies push inflation and unemployment in opposite directions.

Policymakers face this tradeoff regardless of whether inflation and unemployment

both start out at high levels (as they were in the early 1980s), at low levels (as they were in the late 1990s), or someplace in between.

Why do we face this short-run tradeoff? According to a common explanation,it arises because some prices are slow to adjust. Suppose, for example, that the government reduces the quantity of money in the economy. In the long run, the

only result of this policy change will be a fall in the overall level of prices. Yet not

all prices will adjust immediately. It may take several years before all firms issue

new catalogs, all unions make wage concessions, and all restaurants print new

menus. That is, prices are said to be sticky in the short run. Because prices are sticky, various types of government policy have short-run effects that differ from their long-run effects. When the government reduces the quantity of money, for instance, it reduces the amount that people spend. Lower spending, together with prices that are stuck too high, reduces the quantity of goods and services that firms sell. Lower sales, in turn, cause firms to lay off workers. Thus, the reduction in the quantity of money raises unemployment temporarily until prices have fully adjusted to the change.

8.Aslan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates that it will cost him $10,000 to purchase, repair and restore the car, and that he can sell the finished car for $13,000. When he has spent a total of $10,000 on the project, he discovers that he needs to replace the engine. It will cost Aslan $4,000 to replace the engine. He can sell the car without the new engine for $9,000.

What should he do? Explain your answer taking into consideration marginal cost and marginal benefit analysis.

marginal changes small incremental adjustments to a plan of action.

9.You must decide whether or not to attend graduate school (Master Degree) after your graduation of SDU. How might you use marginal analysis to make your decision? What principle would help you to do so & explain it as well?

We use one of the tens principle of economic is “How people make decision” The cost of something is what you give up to get it. Decisions require comparing costs and benefits of alternatives.

Whether to go to college or to work?

Whether to study or go out on a date?

Whether to go to class or sleep in?

The opportunity cost of an item is what you give up to get that item. When making any decision, such as whether to attend college, decision makers should be aware of the opportunity costs that accompany each possible action. In fact, they usually are. College-age athletes who can earn millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high. It is not surprising that they often decide that the benefit is not worth

the cost.

10.Be ready to define any economics terms on “Key Concepts”. Page 14, chapter 1.

Scarcity the limited nature of society’s resources.

Economics the study of how society manages its scarce resources.

Efficiency the property of society getting the most it can from its scarce resources.

Equity the property of distributing economic prosperity fairly among the members of society.

opportunity cost whatever must be given up to obtain some item.

marginal changes small incremental adjustments to a plan of action.

market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

market failure a situation in which a market left on its own fails to allocate resources efficiently.

Externality the impact of one person’s actions on the well-being of a bystander.

market power the ability of a single economic actor(or small group of actors) to have a substantial influence on market prices.

Productivity the amount of goods and services produced from each hour of a worker’s time.

Inflation an increase in the overall level of prices in the economy.

Phillips curve a curve that shows the short-run tradeoff between inflation and unemployment.

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