Unit 5 March 4

Phillips curve

• 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

• single digit misery is good