UNIT 5: Philips Curve

UNIT 5: Philips Curve

                                          Philips curve

                                                   The long-run Philips curve (LRPC)

-          Because the long-run Philips curve exists of the 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 o the right.

-          Decrease in Un will shift LRPC to the left.

                                                 Short run Philips curve (SRPC)

1.      There is a tradeoff between inflation and unemployment. As one increase the other decrease and vice versa.

                                             Long run Philips cure (LRPC)

1.      There is no tradeoff between inflation and unemployment.

2.      LRPC is represented by a vertical line.

3.      The LRPC occurs at the natural rate of unemployment.

4.      The LRPC only shifts if the LRAS shifts

NRU = frictional + structural + seasonal unemployment.

                                                       What changes LRPC

            The major LRPC assumption is that more worker benefits create higher natural rate of unemployment and fewer worker benefit creates lower natural rate.

                                                                      The misery index

                It is a combination of inflation and unemployment in a given year.

-          Single digit misery is good.

Inflation:

It is the general rise in the price level

Deflation:

A general decline in the price level

Disinflation:

Decrease in the rate of inflation over time

Stagflation:

Unemployment and inflation increasing at the same time.