Free-Response Question

1. Question

   Draw a correctly labeled graph showing a short-run Phillips curve.

   
   

   
   

   1. On your graph, show a long-run Phillips curve and label

      
      

      1. the NAIRU

         
         
      
      

      2. the equilibrium inflation rate

         
         
      
      

      
      

      
      
   
   

   2. On your graph, show the effect of an increase in the expected inflation rate. (6 points)

      
      
   
   

   Rubric for FRQ (6 points)

   1 point: Axes labeled with “Unemployment rate” and “Inflation rate”

   1 point: Downward-sloping, labeled, short-run Phillips curve

   1 point: Vertical, labeled, long-run Phillips curve

   1 point: NAIRU is labeled where the long-run Phillips curve intersects the horizontal axis.

   1 point: The equilibrium inflation rate is shown on the vertical axis at the point where the short-run and long-run Phillips curves intersect.

   1 point: A new, labeled short-run Phillips curve is shown above the original short-run Phillips curve.