Unit VI: The Phillips Curve

u%=unemployment rate
π%=rate of inflation

*The Phillips Curve represents the relationship b/t unemployment and inflation
*trade-off b/t unemployment and inflation occurs over SR
*each point on the Phillips Curve corresponds to a different level of output
*LRPC=long run Phillips Curve

• occurs at NRU

• represented by ↨ line

• no trade-off b/t unemployment and inflation in LR

1. economy produces @ FE output level
2. nominal wages of workers fully incorporates any changes in PL as wages adjust to inflation over the LR

*LRPC only shifts when LRAS shifts (both have the same determinants)
*↑ in unemployment, LRPC →
*↓ in unemployment, LRPC ←
*Increase in AD=up/left movement along SRPC 

• C↑, Ig↑, G↑, and/or Xn↑
• AD→: GDPR↑ and PL ↑; u%↓ and π%↑; up/left along SRPC
• this would be depicted in the graph below 

*Decrease in AD=down/right along SRPC

• C↓, Ig↓, G↓, and/or Xn↓
• AD←: GDPR↓ and PL↓; u%↑ and π%↓; down/right along SRPC
• in this case, point B would move to point A in the graph below

**Check out this blog for more info. on the Phillips Curve and other economic topics: http://macroeconomic1.wordpress.com/