1 / 7

The Phillips Curve

The Phillips Curve. Inverse relationship Unemployment rate Rate of change in nominal wages (inflation) Short-run Phillips curve Long-run Phillips curve. LO 4. Exhibit 5. LO 4. Hypothetical Phillips Curve. c. b. a. d.

kenyon-lane
Download Presentation

The Phillips Curve

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Phillips Curve • Inverse relationship • Unemployment rate • Rate of change in nominal wages (inflation) • Short-run Phillips curve • Long-run Phillips curve LO4

  2. Exhibit 5 LO4 Hypothetical Phillips Curve c b a d The Phillips curve shows an inverse relation between unemployment and inflation. Points a and b lie on the Phillips curve and represent alternative combinations of inflation and unemployment that are attainable as long as the curve itself does not shift. Points c and d are off the curve. Inflation rate (percent change in price level) 10 5 Phillips curve Unemployment rate (percent) 0 5 10

  3. The Short-Run Phillips Curve • Short-run Phillips curve • Labor contracts • Given price level • Given expected inflation • Inflation – as expected • Unemployment = natural rate • Inflation > expected • Unemployment < natural rate • Inflation < expected • Unemployment < natural rate LO4

  4. Exhibit 6 LO4 Aggregate Supply Curve and Phillips Curves in the Short Run and Long Run Potential output Long-run Phillips curve b c c e LRAS Price level a a b d d e SRAS103 5 105 Inflation rate (percent) 3 103 1 101 Short-run Phillips curve AD” AD’ AD Unemployment rate (percent) Real GDP 0 13.9 14.0 14.1 0 4 6 5 Expected price level=103 (3% higher than current level) and AD; actual price level=103; potential output; point a; unemployment=natural rate=5% If AD > expected (AD'): price level=105 > expected; output>potential; higher inflation; lower unemployment. If AD<expected: (AD“); price level=101<expected; output<potential; lower inflation; higher unemployment.

  5. The Long-Run Phillips Curve • Long-run Phillips curve • Vertical line • Economy’s natural rate of unemployment • Workers and employers • Fully adjust to unexpected changes in AD • Long run, for flexible prices and wages • Unemployment • Independent of inflation LO4

  6. The Natural Rate Hypothesis • Long run • Natural rate of unemployment • Independent of AD stimulus • Fiscal policy • Monetary policy • Optimal policy in long run • Results in low inflation LO4

  7. LO4 Short-Run Phillips Curves Since 1960 Exhibit 7

More Related