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The Phillips Curve

The Phillips Curve. A.P. Macroeconomics Ms. McRoy. “Aim”. What is the trade-off between inflation and unemployment in the short-run? In the long-run?. “Do-Now”. LRAS. SRAS. Aggregate Price Level.

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The Phillips Curve

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  1. The Phillips Curve A.P. Macroeconomics Ms. McRoy

  2. “Aim” • What is the trade-off between inflation and unemployment in the short-run? In the long-run?

  3. “Do-Now” LRAS SRAS Aggregate Price Level • Imagine that the economy is operating at E1, but then begins to slide into a recession as a result of decreased consumer confidence. • Graph the effect of this change. • What is the effect on unemployment? • What is the effect on aggregate price level? PE E1 AD YE Real GDP (Y)

  4. Building the Short-run Phillips Curve Price Level LRAS Inflation Rate SRAS P2 E3 P2 c PE PE E1 a P1 b P1 E2 AD2 AD SRPC AD1 Q2 Y Q1 u3 u1 u2 QR Qf QI Unemployment Rate

  5. Building the Short-run Phillips Curve Price Level LRAS Inflation Rate SRAS2 SRAS SRAS1 P2 E3 P2 c PE PE E1 a P1 E2 P1 b SRPC2 AD SRPC SRPC1 Q2 Q1 Y u1 u2 u3 QR Qf QI Unemployment Rate

  6. The Long-run Phillips Curve Phillips Curve Inflation Rate LRPC Suppose now, that the government passes an expansionary fiscal policy… What happens to unemployment and inflation? b c 2% a 0% Unemployment Rate 5% 3% SRPC1 NAIRU SRPC0

  7. NAIRU • Proposed by Milton Friedman (Monetarist) • The non-accelerating inflation rate of unemployment (NAIRU) – the unemployment rate at which inflation does not change over time. • Keeping unemployment below NAIRU leads to accelerating inflation and cannot be maintained. • Keeping unemployment above NAIRU leads to decelerating inflation.

  8. “Aim” What is the trade-off between inflation and unemployment in the short-run? In the long-run?

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