Unit 5: The Phillips Curve 4/19/17

Phillips Curve: Inverse relationship between inflation and unemployment. There is no trade-off.
- Each point on the Phillip's curve correspond to a different level of output.


Long Run Phillips Curve:

-Occurs at the natural rate of unemployment
-Represented by a vertical line
-No trade-off between unemployment and inflation, in the long run because the economy produces at the full employment level.
-LR Phillips curve will only shift if the LRAS shifts
-Increase in Un will shift LRPC -->
-Decrease in Un will shift LRPC <--

Natural Rate of Unemployment = Frictional, Seasonal, Structural Unemployment




Short- Run Phillips Curve:

-Since wages are sticky, inflation changes moves the points of the SRPC.
-If inflation persists and the expected rate of inflation rises then the entire SPRC moves upward.

Stagflation: Unemployment and inflation simultaneously rises.



Supply Shocks: Rapid and significant increases in resources costs.
-If inflation expectations drop due to new technology or efficiency, then the SRPC will move downward.

Misery Index: Combination of inflation and unemployment in any given year.
-Single digit misery is good.