Unit 5 Notes - April 8th, 2016

The Phillips Curve

The Long Run Phillips Curve is vertical at the natural rate of unemployment.

·         Because the LRPC exists at the natural rate of unemployment, structural changes in the economy that affect the natural rate of unemployment will also cause the LRPC to shift.

·         Increases in the natural rate of unemployment shift the LRPC right.

·         Decreases in the natural rate of unemployment shift the LRPC left.

·         There is no tradeoff between inflation and unemployment.

·         LRPC will shift if LRAS shifts.

·         The natural rate of unemployment = frictional + structural + seasonal unemployment [4%-5%]

·         The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.

Supply Shocks: A rapid and significant increase in resource costs which causes the SRAS to shift.

Misery Index: The combination of inflation and unemployment in any given year. A single digit index is good.