Unit 5 - Phillips Curve (04/19/17)

Phillips Curve

It is in inverse relationship between unemployment and inflation. Basically a trade-off , as one increases the other decreases.

• In increae in AD will cause price level and real output to increase, which increases inflation and reduces unemployment.

•  Each point point on the Phillips Curve corresponds to a different level of output.

• Since wages are sticky, inflation changes move the point in SRPC, if inflation persists and expected rate of inflation rises, than the entire SRPC moves upward. In the event that this scenario happens you have stagflation.

• Stagflation, unemployment, and inflation rise simultaneously, wich results in an increase in output cost. In in event that this scenario occurs the Phillips Curve is going to shift outward.

Supply shock- sudden large increse in resource cost.

If inflation expectations drop due tonew technology or efficiency then the SRPC will move downward.

• In the long run LRPC occurs in the natural rate of umenployment

• It is represented by a vertical line.

• There is no trade-offf between unemployment and inflation in the long run, because the economy produces at the full employment output level.

• It will only shift if the LRAS

• Increase in U_n will shift LRAS→

• Decrease in U_n will shift LRAS ←

The major LRPC assumption is that more workers benifits create higher natural rates, and fewer workrs benifits create lower natural rates.

Misery Index - it is a combination of unemployment and inflation in any given year. 

• Single digit misery is good