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Download Macro 3.5- The Phillips Curve
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Unit 3: Aggregate Demand and Supply and Fiscal Policy Copyright ACDC Leadership 2015 1 The Phillips Curve Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increase? Copyright ACDC Leadership 2015 In general, there is an inverse relationship between unemployment and inflation Copyright ACDC Leadership 2015 3 Short Run Phillips Curve When the economy is overheating, there is low unemployment but high inflation Inflation When there is a recession, unemployment is high but inflation is low 5% 1% SRPC Copyright ACDC Leadership 2015 2% 9% Unemployment 4 Short Run Phillips Curve What happens when AS falls causing stagflation? Increase in unemployment and inflation Inflation 5% SRPC1 1% SRPC Copyright ACDC Leadership 2015 2% 9% Unemployment 5 Short Run vs. Long Run In the long run there is no tradeoff between inflation and unemployment Inflation Long Run Phillips Curve 5% The LRPC is vertical at the Natural Rate of Unemployment 3% 1% Copyright ACDC Leadership 2015 2% 5% 9% Unemployment 6 The Phillips Curve in real life isn’t like the textbook AD/AS and the Phillips Curve Copyright ACDC Leadership 2015 AD/AS and the Phillips Curve Show what happens on both graphs if AD increase Price Level LRAS Inflation LRPC AS PLe AD1 AD QY Copyright ACDC Leadership 2015 GDPR SRPC UY Unemployment 9 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls? Price Level LRAS Inflation LRPC AS PLe AD AD1 QY GDPR Copyright ACDC Leadership 2015 SRPC UY Unemployment 10 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC at full employment. What happens when AS falls? Price Level LRAS Inflation LRPC AS1 AS PLe SRPC1 AD QY Copyright ACDC Leadership 2015 GDPR SRPC UY Unemployment 11 AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up? Price Level LRAS AS Inflation LRPC AS1 PLe SRPC AD QY Copyright ACDC Leadership 2015 GDPR SRPC1 UY Unemployment 12 Price Level LRAS SRAS Inflation LRPC SRPC Copyright ACDC Leadership 2015 QY GDPR UY Unemployment 13 Price Level SRAS LRAS Inflation LRPC PLe AD AD3 Copyright ACDC Leadership 2015 QY GDPR AD2 SRPC UY Unemployment 14 Price Level LRAS AS1 SRAS Inflation LRPC AS2 PLe SRPC1 AD Copyright ACDC Leadership 2015 QY GDPR SRPC2 SRPC UY Unemployment 15 Price Level LRAS AS2 AS Inflation LRPC PLe AD2 AD Copyright ACDC Leadership 2015 QY GDPR SRPC1 SRPC UY Unemployment 16 2008 Audit Exam 18 Copyright ACDC Leadership 2015 Analyzing the Economy Graphically Copyright ACDC Leadership 2015 19 Use the following models to show full employment, a recessionary gap, and an inflationary gap. 1. PPC 2. Business Cycle 3. AD/AS 4. Phillips Curve Copyright ACDC Leadership 2015 ACDC 3.5 The Good, the Bad, and the Ugly Unemployment Inflation GDP Growth Good 6% or less 1%-4% 2.5%-5% Worry 6.5%-8% 5%-8% 1%-2% Bad 8.5 % or more 9% or more .5% or less Copyright ACDC Leadership 2015 21
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