Philip's Curve

  • It shows the inverse relationship between inflation and unemployment, suggesting that when inflation rises, unemployment tends to fall, and vice versa.

  • When inflation is high, wages go down because of less purchasing power.

  • When inflation low, each dollar has more value, so more people are going to hold on to it more.

Long-Run Philip’s Curve

  • It shows the natural rate of unemployment (full employment)

  • Equilibrium is reached when SRPC intersects LRPC.

Inflationary and Recessionary Gaps

  • Inflationary Gap is to the left of LRPC, and recessionary gap is right of LRPC

Demand Shocks & PC

Supply Shocks

  • With supply shocks, the point on the curve will not move, rather the whole curve moves

  • Contrary to the ADAS curve shifting to the left, the PC curve will shift to the right, because a leftward shift in the ADAS curve causes price level to rise, thus inflation would increase

LR Impacts and Corrections

  • In an inflationary gap, the SRAS curve will shift left, and the SRPC curve will shift to the right, to reestablish equilibrium and increase inflation a bit more.

Shifters of LRPC

  • Decreasing structural and/or frictional unemployment will decrease LRPC, through more qualified workforce (structural), and improved job matching processes (frictional), thereby leading to a lower long-run unemployment rate, which shifts the curve to the left.

  • increasing structural and/or frictional unemployment will increase LRPC