The Phillips Curve - Mod 5.2

What are the two rules between the relationship of the unemployment rate and the output gap?

Actual aggregate output is equal to potential output. Actual unemployment is equal to the natural rate of unemployment.

If there is an inflationary gap (positive output gap), what happens to unemployment?

Unemployment is below the natural rate of unemployment.

If there is a recessionary gap (negative output gap), what happens to unemployment?

Unemployment is above the natural rate of unemployment.

What does the short-run Phillips Curve represent?

The negative short-run relationship between the unemployment rate and the inflation rate.

Why does the SRPC slope downward?

Because the relationship between the unemployment rate and the inflation rate is negative.

If AD shifts to the right, what is shown on the Phillips Curve?

A shift ON the SRPC line to the left

If AD shifts to the left, what happens to the inflation rate on the Phillips Curve?

inflation rate decreases

What would a negative supply shock do to the Phillips curve?

Shift OF the SRPC upward

What is the NAIRU?

The non-accelerating inflation rate of unemployment which is the natural rate of unemployment.

What happens to SRPC if Aggregate supply shifts?

There is a shift of the SRPC line

Why do changes in expected inflation affect the short-run Phillips curve?

Because the wage rate that workers and employers agree to will be higher if everyone expects higher inflation. Higher expected inflation means an upward shift of the SRPC

What does the long-run Phillips curve represent?

The relationship between unemployment and inflation after expectations of inflation have had time to adjust.

How do we avoid accelerating inflation over time?

The unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation.

Why is the LRPC vertical?

Because any unemployment rate below the natural rate of unemployment leads to ever - accelerating inflation. In the long run, unemployment always returns to its natural rate.

What do points to the left of long-run equilibrium represent?

Inflationary gaps

What will shift the Long-run Phillips Curve?

a change in the natural rate of unemployment

What will shift the natural rate of unemployment?

shifts in labor market demographics, technological advancements, institutional policies, and labor mobility.