ECON 272

In Class Exercise Ten – Inflation and Deflation - Why Inflation Happens and The Phillips Curve Theory

1.  Explain why inflation is a tax and why it is a hidden tax.

2.  Explain another way (besides being a hidden tax) that governments (politicians) might gain from inflation.

3.  Graphically and in words explain the Phillips Curve theory regarding inflation.

a. That is, what is the government trying to achieve in the short run -- what is the theory?  Draw the short-run Phillips curve and explain in words.  Make sure you discuss nominal wage increases vs. price increases.

b. What happens in the long run?  Why?  Draw the long-run Phillips curve and explain in words.

4.  What questions do you still have about this material?