Unit 5

The Phillips Curve

• The Long-Run Phillips Curve: measure of inflation and unemployment. Natural rate of unemployment is held constant.
  
• Because the LRPC exists at the natural rate of unemployment (U_N), structural changes in the economy that affects U_N will also cause the LRPC to shift.
• Increase in U_N will shift LRPC →
• Decrease in U_N will shift LRPC ←
• Relating Phillips Curve to AS/AD
• Changes in the AS/AD model can also be seen in the Phillips Curve.

Long Run

• Occurs at the natural rate of unemployment.
• Always represented by a vertical line.
• There is no trade off between unemployment and inflation.
• If the NRU changes so does the LRPC
• NRU = Frictional + Structural + Seasonal Unemployment
  (4-5%)
• The major LRPC assumption is that more worker benefits create higher natural rates and a few worker benefits create lower natural rates.