Unit 5 - Phillips Curve

Definition:

• Inverse relationship between inflation and unemployment
• Only occur in the short run

+Long Run Phillips Curve

• Occurs at natural rate of unemployment
• No trade off between unemployment and inflation
• It only shifts if the LRAS curve shifts
• Major LRPC assumption is that more worker benefit create higher natural rate and fewer benefit create lower natural rate.
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+Short Run Phillips Curve

• Has relevant to Okun Law
• Inverse relationship between inflation and unemployment
• Since wages are sticky, inflation changes move the point on SRPC
• If inflation persist, and the expected rate of inflation increases, the entire SRPC moves upward, create stagflation. 
• If inflation expectation drop due to new technology, SRPC will move downward.

 

Stagflation
High unemployment and high inflation simultaneously

Misery Index
Combination of inflation and unemployment in given year
Single digit misery is good 

Natural Rate of Unemployment
Frictional, Structural and seasonal unemployments