Unit 5 - Phillips Curve (4-8-16)

Long Run Phillips Curve

• Because the LRPC exists at the natural rate of unemployment (Un), structural changes in the economy that affect Un also cause LRPC to shift
• Increases in Un will shift LRPC --->
• Decreases in Un will shifts LRPC <---

• No tradeoff between inflation and unemployment
• Always vertical at natural rate of unemployment
• Will only shift if LRAS shifts
• Major LRPC assumption is that more worker benefits create higher natural rates, and fewer benefits creates lower natural rates

Short Run Phillips Run

• Short-Run AS SHIFTERS
• Supply Shocks are rapid and significant increases in resource cost, cause SRAS curve to shift
• Outcome: SRAS will decrease <---, SRPC will increase --->
• Misery Index: combination of inflation and unemployment in any given year
• *single digit misery is good*

Inflation: rise in price level

Deflation: general decline in price level

Disinflation: decrease in rate of inflation over time

Stagflation: where inflation and unemployment increase at same time