Phillip's Curve- 04/19/2017

Phillip's Curve

• Phillip's Curve:
  -An inverse relationship between unemployment and inflation.
  -As one increases, the other decreases
  -An increase in AD will cost price level and real output to increase, which increases inflation and reduces unemployment
  -Each point on the Philip's curve corresponds to a different level of output  
  -Since wages are sticky, inflation changes move the points on the SRPC
  If inflation persists, and the expected rate of inflation rises, then the entire SRPC moves upward.
  
• Stagflation: 
  -When inflation and unemployment rise simultaneously, which results in an increase in input cost
  -Philip's curve shifts outward.
  
  
• Supply Shocks:
  -Sudden large increase in resource costs.
  -If inflation expectations drop, due to new technology or efficiency, then the SPRC will move downward.
  
• Long-Run:
  -LRPC occurs at the natural rate of unemployment
  -Represented by a vertical line
  -No trade-off between unemployment and inflation because the economy produces at the full employment output level.
  -Will only shift if LRAS shifts.
  -Increases in unemployment shifts LRPC to the right.
  -Decreases in unemployment shifts LRPC to the left.
  -Natural rate of unemployment is equal to frictional, structural and seasonal.
  -Major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.
  
• Misery Index: 
  -A combination of unemployment and inflation in any given year.
  -Single- digit misery = good.