Unit 5 - Long Run Phillips Curve

Because the LRPC exist at the natural rate of unemployment, structural changes in the economy that affect unemployment will also cause LRPC to shift

• +Increase in unemployment: LRPC ->
• +Decrease in unemployment: LRPC <-

Changes in the AS/AD model can also be seen in the Philips Curve
Think of changes in AS/AD affects the PC like 2 sets as mirror image
Note:

• The 2 models are not equivalent. AS/AD model is static. PC includes changes over time. Whereas AS/AD shows one time changes in price level as inflation or deflation.
• Phillips Curve illustrate continuous changes in price level as either increased inflation or disinflation.

Disinflation

• Reduction in inflation rate from year to year, usually displayed in LRPC
• Also occurs when AD declines
• In short run, profits fall and unemployment increase

Deflation
Actual drop in price level.