UNIT 5-

  Phillip's curve

a.    Short run

·         Represents the relationship between employment and inflation

·         Trade off between inflation and unemployment that only occurs in the short run

·         There is an inverse relationship between unemployment and inflation

·         Has relevance to Okun's law.

·         Since wages are sticky, inflation changes, move the points on the SRPC

·         If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upward due to stagflation

·         If inflation expectations drop, due to new technology or economic growth, then the SRPC moves downward

b.    Long run

·         Long run Phillips curve occurs at the natural rate of unemployment 

·         Represented by a vertical line

·         No trade off between unemployment and inflation in the long run, which means that the economy produces at the full employment level

·         Will only shift if the LRAS curve shifts

·         Structural, seasonal, and frictional unemployment

·         Full employment is around 4-5%

·         Major LRAC assumption is that more worker benefit create higher natural rates. Fewer worker benefits create lower natural rates.

·         Whatever shifts PPC, will shift LRAS