Week 12 — Inflation and Expectations Report: The Phillips Curve and the Quantity Equation — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 11 of the term — read the short-run and long-run Phillips curves and the quantity equation with the course's numbers, explain what each figure means, and tell a relative why a little more inflation does not buy lower unemployment for good.

This week you learned that lower unemployment can come with higher inflation along one short-run Phillips curve, that the trade-off fades once expected inflation catches up, and that in the long run more money raises prices rather than real output. In Week 3 you measured inflation and unemployment, in Week 6 you saw expected inflation shift short-run aggregate supply, and in Weeks 10 and 11 you watched more money lower interest rates and raise output in the short run. In this assignment you work four short problems, interpret each one, and explain to a relative why a little more inflation does not buy lower unemployment for good. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles.

The task

This report uses the week's illustrative numbers, constructed for this course and not real data: one short-run Phillips curve through 6 percent unemployment with 2 percent inflation and 4 percent unemployment with 6 percent inflation, with the natural rate midway between them; and a quantity equation with a money supply of 500 dollars, a velocity of 4, and real output of 1,000 units.

Work these four problems, showing every step on its own line:

1. In the course's illustrative economy, one short-run Phillips curve passes through 6 percent unemployment with 2 percent inflation and 4 percent unemployment with 6 percent inflation. Moving from the first point to the second, what is the slope of the curve, in percentage points of inflation per percentage point of unemployment?
2. In the same illustrative economy, the natural rate of unemployment sits midway between the two unemployment rates on the curve, 4 percent and 6 percent. Policy holds unemployment at 4 percent until workers and firms come to expect the 6 percent inflation that comes with it. At what unemployment rate, in percent, does the economy settle in the long run?
3. In the course's illustrative quantity equation, the money supply is 500 dollars, velocity is 4, and real output is 1,000 units. What is the price level?
4. In the same illustrative quantity equation, the money supply rises to 550 dollars while velocity stays at 4 and real output stays at 1,000 units. What is the new price level?

Beside each figure, add one brief interpretation in plain words. For problem 1, say what the slope means for the trade-off between unemployment and inflation, and why a slide from one point to the other is a movement along the curve rather than a shift. For problem 2, say what the settling point means for unemployment and inflation, and why the long-run Phillips curve is vertical instead of a permanent menu. For problem 3, say what the price level means, and measure velocity from the same numbers to show that it is not a fudge factor. For problem 4, give the percentage rise in the price level, and explain why real output stays the same in the long run but can change in the short run.

Explain it to a non-expert

A relative who manages a small restaurant hears a radio host say that "a little more inflation is a fair price for keeping everyone employed for good." Write a 3–5 sentence message your relative could follow: why lower unemployment can come with higher inflation for a while, why the deal fades once workers and customers come to expect the higher inflation, and one honest open question, such as how fast expectations adjust or where the natural rate really sits. Explain any technical term in everyday words. More than one good open question can be defended.

For a different, ungraded example, imagine a coffee shop that starts giving every customer a free pastry to bring in more visits, and a regular who asks whether the shop will stay busier. Model message: "At first the free pastry is a nice surprise, so more people stop in. After a few months everyone expects the pastry, so it stops pulling in anyone new, and the shop is back to its usual crowd while still paying for pastries. To bring in more people again, the shop would need an even bigger treat. Whether the effect lasts weeks or months depends on how fast people get used to it."

Use that pattern for the radio host's claim, with your own explanation.

Here is one honest note about scope: every number in this assignment is illustrative, so do not add a real inflation rate, a real unemployment rate, or a real natural rate from the news. Economists disagree about the size of the real natural rate and about how fast expectations adjust, which is why this report keys only on the model's numbers.

How to work

1. Draft all four figures, the four brief interpretations, and your message for the relative.
2. Check your draft against the attached scoring criteria, criterion by criterion: is the trade-off stated forwards with the right sign on the slope, does unemployment return to the natural rate once expectations catch up, is the quantity equation divided the right way, and is every figure explained in plain words?
3. Revise at least one calculation or explanation, and write two or three sentences on what you changed and why.

Deliverables

Submit your inflation-and-expectations report with all four figures, their brief interpretations, your message for the relative, and your two or three sentences on the revision. You may submit it written, recorded as audio or video with a transcript, or as a labelled sketch of the two Phillips curves with a short note; every form is graded by the same scoring criteria.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, reasoning, and explanations must be your own work. This version is built to be completed without any AI tool, and no part of it requires one. Use the chapter, your notes, and a calculator or spreadsheet, and show every step so your work can be checked. Do not copy another student's figures or wording.

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