UNIT 5: Phillips Curve

PHILLIPS CURVE

The long-run Philips curve (LRPC)

- Because the long-run Philips curve exists of the natural rate of unemployment (Un), structural changes in  the economy that affect Un will also cause the LRPC to shift.

- Increase in Un will shift LRPC o the right.

- Decrease in Un will shift LRPC to the left.

Short run Philips curve (SRPC)

- There is a tradeoff between inflation and unemployment. As one increases the other decreases and vice versa.|

Long Run Philips Curve (LRPC)

1. There is no tradeoff between inflation and unemployment.

2. LRPC is represented by a vertical line.

3. The LRPC occurs at the natural rate of unemployment.

4. The LRPC only shifts if the LRAS shifts

NRU = frictional + structural + seasonal unemployment.

What changes LRPC?The major LRPC assumption is that more worker benefits create a higher natural rate of unemployment and fewer worker benefit creates a lower natural rate.

                                                                     
THE MISERY INDEX-It is a combination of inflation and unemployment in a given year.

- Single digit misery is good.

Inflation: It is the general rise in the price level

Deflation: A general decline in the price level

Disinflation: Decrease in the rate of inflation over time

Stagflation: Unemployment and inflation increasing at the same time.