Unit 5 continued

The Phillips Curve

 Natural Rate of unemployment is held constant

•     LR Phillips Curve exists at a Natural Rate of Unemployment (Un) Structural changes   in the economy that affect Un will also cause the LRPC to shift.
•      Increase in Un will shift LRPC →
•       Decrease in Un will shift LRPC ← 
•  SR Phillips Curve – tradeoff between inflation and unemployment

  (when one goes up the other goes down)

Relating Phillips Curve to AS/AD:

The changes in AS/AD model can also be seen in Phillip’s curve

LRPC: 

Occurs at natural rate of unemployment represented by vertical line·         No tradeoff between UN and inflation
·         Only shift if LRAS shifts
·         if NRU changes so does LRPC
·         NRU = frictional + structural + seasonal Un (4-5%)
·         Major LRPC assumption is that more worker benefits create higher natural rates and a 

fewer worker benefits create a lower natural rate.

Misery Index: Is the combination of inflation and unemployment in any given year
single digit misery is good

Supply ShocksRapid and significant in resource cost

DisinflationReduction in inflation from year to yearcan be seen in LRPC

Important Vocabulary Words you need to know:

Deflation - General decline in price

Inflation - General rise in price

Stagflation - unemployment and inflation rise/increase at the same time