5.2 Phillips Curve

Phillips Curve shows tradeoff between ____ and ____

inflation and unemployment

Inflation and unemployment have a(n) _______ relationship

inverse

_______ caused many to question accuracy of Phillips Curve

1970s stagflation

When the economy is overheating, there is ___ inflation and ___ unemployment

LOW unemployment, HIGH inflation

When the economy is in a recession, there is _____ unemployment and ___ inflation

HIGH unemployment, LOW inflation

What happens to the Phillips Curve during stagflation?

UR and Inflation BOTH increase

SRAS and SRPC relationship

they are MIRRORED

when SRAS shifts right, SRPC shifts left

SRPC Shifters/Changes

1. ΔAD = movement ALONG SRPC

2. ΔSRAS = shift SRPC (mirrored)

3. Δexpected inflation = shift SRPC

   • if expected inflation is 2%, shift SRPC right 2%

Long Run Phillips Curve

• no trade off between inflation and unemployment

• LRPC is vertical at NRU

• LRPC NEVER SHIFTS