An inverse relationship between unemployment and inflation
increase in AD will cause price level and real output to increase which increases inflation and reduces unemployment
each point on the Phillips curve. corresponds to a different level of output
since wages are sticky, inflation changes moves the point on the SRPC
if inflation persists and the expected rate of inflation rises then the entire SRPC moves upward
Stagflation- when inflation and unemployment rise simultaneously which results in an increase in input cost (Philips Curve will shift outward)
Supply Shocks- a sudden large increase in resource cost
if inflation expectations drop due to new tech or efficiency then the SRPC will move downward
in the long run Phillips curve occurs at the natural rate of unemployment
Represented by a vertical line
there is no trade off between unemployment and inflation in the longrun
because the economy produces at the full employment level
it will only shift if LRAS shifts
increase in Un will shift LRPC ->
decrease in Un will shift LRPC <-
Natural rate of employment rate of unemployment is equal to frictional, structural, seasonal. The major LRPC assumption is that more worker benefits create higher natural rates, few worker benefits create lower natural rates
Misery index- Combination of unemployment and inflation in any given year
Foreign Exchange -buying and selling of currency -Any transaction that occurs in the balance of payments necessities foreign exchange -the exchange rate is determined in the foreign currency markets
Changes in Exchange Rates -exchange rates are a function of the supply and demand for currency Exchange Rate Determinants -consumer taste -relative work -relative price level -speculation
Exports and Imports -appreciation of dollar causes price of goods to go up; reducing exports and increasing imports -depreciation of dollar causes price of goods to be cheaper; increasing exports and reducing imports
Specialization -Individuals and countries can be made better off if they will provide in what they can have a comparative advantage and then trade with others for whatever else absolute advantage -The producer that can produce the most output or requires that least amount of inputs (resources) Comparative Advantage -The producer with the lowest opportunity cost -countries should trade if they have a lower opportunity cost -an output problem presents the data as products produced given a set of resources -an input problem presents the data as mount of resources needed to produce a fixed amount of output -When identifying absolute advantage input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources
Balance of Payments -measure of money and the rest of the world -inflows are credit -outflows are referred to as debit 3 accounts -current account -capital/financial account -official reserves account
Current Account Balance of Trade or Net Exports -exports of goods and services-imports of goods and services -exports are credit -imports are debit Net Foreign Income -income earned by US owned foreign assets-Income paid to foreign held US assets Net Transfers foreign aide---> a debit to the current account
Capital/ Financial Account -the balance of capital ownership -includes the purchase of both real and financial assets -Direct Investment in the united States is a credit to the capital account ex: Toyota factory in San Antonio -Direct Investment by US firms/Individuals in a foreign country are debits to the capital account ex: The intel factory in San Jose, Costa Rica -Purchase of foreign financial assets represents a credit to the capital account - the current account and the capital account should zero each other out -That is...if the current account has a negative balance(deficit) the capital account should have a positive balance(surplus)
Official Reserves -the foreign currency holdings of the US FED -when there is a balance of payments surplus the FED accumulates foreign currency and debits the balance of payments -when there is a balance of payments deficit the FED depletes its reserves of foreign currency and credits the balance of payments -The official Reserves zero out the balance of payments
