Unit 5 - April 1 (Phillip Curve)

The Phillips Curve - deals with inflation and unemployment. 

3 Generalizations of Inflation and Unemployment.

1. Inverse relationship.
2. AS Shocks can cause both higher rates of inflation and rates of unemployment.
3. There is no significant trade off between the two in the long run

If inflation persists and the expected rate of inflation rises, then the entire SRPC move upward (Stagflation possibility or probable).

If inflation expectation drops due to new technology, then new SRPC moves downward. 

Movements of Short Run Phillips Curve (SRPC)

• Increase in AD (C, Ig, G, Xn) - Up/Left along the SRPC. 
• Decrease in AD - Down/Right along the SRPC. 
• Increase in AS - SRPC moves Left (<---). 
• Decrease in AS - SRPC moves Right (--->). 

Long Run Phillips Curve (LRPC) - vertical at full employment (Natural Rate of Unemployment - seasonal, frictional, and structural).

• Major Assumption : More workers benefit creates higher natural rate of unemployment. Fewer workers benefit creates lower natural rate of unemployment.
• Example - Jobs that pays less = More stable people.
• Shifts - same as LRAS (technological advances).

Misery Index - combination of inflation and unemployment in any given year.

• Single digit misery - Good.
• Example - Unemployment rate = 4% ~ 5%