PHILLIPS CURVE
- Inverse relationship between installation and unemployment. There is a trade off.
- Each point on the Phillips curve corresponds to a different level of output.
- Long run Phillips curve: occurs at the natural rate of unemployment. It is represented by a vertical line. There is no trade off between unemployment and inflation because the economy produces at the full employment level. will only shift if LRAS shifts
- natural rate of unemployment = seasonal, sectional, and structural unemployment.
- Increase in Un will s
- hift LRPC right.
- Decrease in Un will shift the LRPC left.
SHORT RUN PHILLIPS CURVE.
- Since wages are sticky, inflation changes moves the points on the SRPC.
- If inflation persists, and the expected rate of inflation rises, then the entire SRPC moves upward.
- Stagflation – unemployment and inflation simultaneously rise.
- Supply socks – Rapid and significant increases in resource cost.
- If inflation expectations dropped due to new technology or efficiency, then the SRPC will move downward.
- Misery index - combination of inflation and unemployment in any given year.
- Single digit Misery is good
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