Unit 5; Day 2

The Phillips Curve

• Long Run Phillips Curve
• Natural rate of unemployment is constant | 
• Because the LRPC exists at natural rate of unemployment(Un), structural changes in the economy that affect Un will also cause LRPC to shift
• Increases in Un will shift LRPC > 
• Decreases will shift LRPC < 
• Short Run Phillips Curve
• Tradeoff between inflation and unemployment
• When one increase, the other decrease
• Inflation increases as economy expands
• Recession- unemployment increases as ecnomy slows (contracts)
• Along the curve- Cyclical changes in GDP

• Stagflation
• Late 70s-81: inflation+unemployment increased at same time
• New Phillips approach
• New range- SRPC canmove outward, inward
• Cost push inflation- more stress on resources,  wage, input cost
• Supply Shocks- Rapid loss of resources or increase in resource cost
• SRPC moves otuward during shocks
• Inward as society increases productivity or regains resources
• LRPC (Video going over Phillips curve and the effects of inflation and unemployment)
• Inflation- Society adjusts for ost/wage increase with new prices
• Is- Efficient PPF
• Natural rate of unemployment= Full employment 
• No trade off between inflation & unemployment
• Economy produces at full employment output level
• Represented by vertical line
• Occurs at Natural rate of unemployment
• Shifts in LRAS also shift LRPC
• Major LRPC Assumption: more worker benefits create higher natural rates; fewer worker benefits create lower natural rates
• Phillips and AD/AS curves-
• Change pts on SRPC- if ad changes move along curve
• Move the SRPC- If SRAS changes, shift SRPC
• Misery Index
• Combination of inflation and unemployment in any given year
• Single Digit Misery is good