Monday, May 16, 2016

Unit 5: Phillips Curve

The Long-Run Phillips Curve (LRPC)

  • Long-Run Phillips curve exists off 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 to the right.
  • Decrease in Un will shift LRPC to the left.



The Short-Run Philips Curve (SRPC)
  • There is a trade off between inflation and unemployment. 
  • As one increases, the other decreases and vice versa. 
LRPC
  1. There is no trade off 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 a higher natural rate of unemployment and fewer worker benefit creates a lower natural rate

The Misery Index-
  • It's 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 

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