- Short Run Phillips Curve-
- In the short-run, the Phillips curve represents a trade off between inflation & unemployment.
- Inverse relationship (as inflation increases, unemployment decreases)
- Each point on the Phillips curve corresponds to a different level of output.
- Long-Run Phillips Curve-
- Occurs at natural rate of unemployment
- Represented by a vertical line
- There is no trade-off between inflation & unemployment in the long-run.
- In the long-run, the economy produces at the full employment output level.
- the LRPC (long-run phillips curve) will only shift if the LRAS curve shifts.
- Increase in unemployment (Un) will shift LRPC right.
- Decrease in unemployment will shift LRPC left.
- Short-run-
- If inflation persists & the expected rate of inflation rises, then the entire SRPC moves upwards.
- Brings about stagflation
- Stagflation-
- Simultaneous rise in inflation & unemployment.
- Supply Shocks-
- Rapid & significant increase in resource cost, which causes SRAS curve to shift.
- Ex) Depreciation of dollar, gas price increase
- If inflation expectations drop due to new technology, then the SRPC will move downward.
- Natural Rate of Unemployment related to...
- Frictional
- Seasonal
- Structural
- Misery Index-
- Combination of inflation & unemployment in any given year.
- Single digit misery is good
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