Phillips Curve

Concepts

  • Short-Run Phillips Curve
  • Inverse Relationship between Inflation and Unemployment
  • A Point on SRPC Corresponds to an Equilibrium Point in the AD-AS
  • Shifting AD Leads to a Movement Along SRPC
  • Shifting SRAS Leads to a Shift in the SRPC
  • Long-Run Phillips Curve
  • Natural Rate of Unemployment
  • Unemployment Compensation
  • Illustrate Different Economic Conditions Using Points on the Phillips Curve
    • Recession
    • Full-Employment
    • Inflation

Overview

The Phillips Curve is not like a typical market graph in economics.  It does not illustrate the market forces of supply and demand and their relationship between price and quantity. Instead, it shows the historical inverse relationship that tends to exist between inflation and unemployment.  Inflation tends to increase and unemployment tends to decrease as the economy grows.  Inflation tends to decrease and unemployment tends to increase as the economy slows down.  This inverse relationship is why the short-run Phillips Curve (SRPC) is a downward sloping line.  There is a very close link between the AD-AS model and the Phillips Curve.  If AD shifts, it causes a movement along the SRPC and if SRAS shifts, it causes the SRPC to shift (in the opposite direction).  The long-run Phillips Curve (LRPC) is vertical for a similar reason the LRAS is vertical; it creates a limit.  It establishes the lowest possible unemployment rate an economy can sustain in the long-run.  This “Natural Rate of Unemployment (NRU)” corresponds to the Full-Employment level of output in the AD-AS model.  Shifting the LRPC deals with outside influences that cause the NRU to change.  The main example we use to illustrate this concept is unemployment compensation.  The lesson concludes by learning how to illustrate short-run and long-run equilibriums on the Phillips Curve graph, along with how to identify specific economic conditions using specific points on the graph.

Materials

Lecture

Video Coming at Later Date

Quiz

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