Unit 5 The Phillips Curve (4-8-16) & Inflation (4-11-16)

Unit 5

The Phillips Curve & Inflation

side note - misery index

The Long-Run Phillips Curve

• Measures unemployment and inflation.

• Note: Natural rate of unemployment is held constant.

• Because the Long-Run Phillips Curve exist at the natural rate of unemployment, structural changes in the economy that affect unemployment will also cause the LRPC to shift.

• Increases in unemployment will shift LRPC to the right
• Decreases in unemployment will shift LRPC to the left.

The Short-Run Phillips Curve

• SRPC has a trade-off between inflation and unemployment (when one increases the other decreases). (inverse relationship)

• LRPC: There is no tradeoff between inflation and unemployment.

          1. The economy produces at the full employment output level.

          2.It is represented by a vertical line.

          3. It occurs at the natural rate of unemployment.

• Natural unemployment rate (NRU)= Frictional +Structural +Seasonal

• Full employment = 4-5%

• LRAS shifters also shifts LRPC.

• The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.

The misery index:  A combination of inflation and unemployment in any 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.