The Phillip's Curve

I.            In the short run it's a trade-off between inflation and unemployment.

II.            They have an inverse relationship.

III.            Each point on the PsC corresponds to a different level of output.

IV.            Higher inflation = lower unemployment

V.            Long-run Phillip's Curve: LRPC

a.      Occurs at the natural rate of unemployment.

                                i.            Frictional (normal)

                              ii.            Seasonal

                           iii.            Structural (creative destruction)

                           iv.            Not Cyclical

b.      Represented by a vertical line.

c.       No trade-off between inflation and unemployment in the long run

d.     The economy produces at the full employment output level

e.      Will only shift if the LRAS curve shifts.

f.        An increase in unemployment (a decrease in employment) will shift LRPC ->

g.      A decrease in unemployment (an increase in employment) will shift LRPC <-

h.      A movement in AD will mirror on the Phillip's Curve

VI.            When SRAS goes right, SRPC goes left

VII.            When SRAS goes left, SRPC goes right

VIII.            Short-run Phillip's Curve: SRPC

a.      If inflation persists and expected rate of inflation rises, then the entire SRPC moves up.

b.      Stagflation: simultaneous rise in inflation and unemployment.

c.       Supply shock: rapid and significant increase in resources' costs which causes SRAS curve to shift.

                                i.            Depreciation of the dollar

                              ii.            Oil embargo

d.     If inflation expectations drop due to new technology, then the SRPC will move down.

IX.            Misery Index

a.      A combination in inflation and unemployment in any year.

b.      Single-digit index is good.

Phillip's Phillip's Curve

Phillip's Phillip's Phillip's Curve

Phillip's Phillip's Phillip's Curve Curve