Econ Notes: Phillips Curve

-relationship between inflation and unemployment

Assumptions

1. There is a short run trade-off between the rate of inflation and the rate of unemployment
2. Aggreagate supply shocks can cause both higher rates of inflation and higher rates of unemployment (SRPC [short run Phillips Curve] shifts to the right or outward) 
3. There is no significant trade-off between inflation unemployment in the long run

If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upward (stagflation is possible or probable).

If inflation expectations drop due to new technology, then the SRPC moves downward

Increase in AD = up/left movement along SRPC

Increase in AS = SRPC shift left

Long Run Phillips Curve (LRPC)

-represented by a vertical line

-only shifts if the LRAS shifts (technology or economic growth)

-exists at the nru: natural rate of unemployment (seasonal, structural, and frictional unemployment)

-if nru changes, LRPC changes

-Increase in Un shifts LRPC ->

-Decrease in Un shifts LRPC <-

Misery Index

-combination of inflation and unemployment in any given year

-Single-digit misery is good

-ex: unemployment higher than 9% is bad

Supply Shock
-rapid and significant increases in resource cost, which causes SRAS curve to shift and will produce a corresponding shift in the SRPC curve
-causes: wage hikes, all-embargo, increases in input prices
-stagflation: simultaneous increase in inflation and unemployment

Disinflation
-decrease in inflation from year to year
-can be seen in the LRPC
-prices go down, profits fall, unemployment rate increases