04/01/14 Phillips Curve

• Phillips Curve- deals with inflation and unemployment. 
• 3 generalizations about inflation and unemployment. 
• - Inverse relationship between unemployment and inflation. 
• - Aggregate Supply shocks can cause both higher rates of inflation and higher rates of unemployment. 
• - No significant trade off between inflation and unemployment in the long run. 
•  If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upwards (stagflation is possible or probable.)
• If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upwards (stagflation is possible or probable) 
• If inflation expectation drops due to new technology, than the SRPC moves downward. 
• SRPC= short run Phillips curve.
• Increase in AD= Up/left movement doing SRPC. 
• Decrease in AD= down/right along SRPC. 
• Increases in SRAS, SRPC shifts to the left. (Decreasing) 
• LRPC is vertical at full employment.
• AKA natural rate of unemployment
• Seasonal, frictional
• Major LRPC assumption is that more workers benefits create higher natural rates of unemployment and fewer benefits create lower natural rate of unemployment. 
• Shifts in LRPC
• Tech advancement (Like LRAS)
• Misery Index- Combination of inflation and unemployment in a given year.  Single digit misery is good/
• Ideal # of unemployment is 4-5%
• Ideal # of inflation rate is 2-3%