Phillips Curve

Philips Curve - Shows the relationship between unemployment and inflation
Long Run Philips Curve - Occurs at natural rate of unemployment

• Represented by vertical line

-There is no trade-off between unemployment and inflation in the long run (economy produces at full employment level

-LRPC will only shift if LRAS curve shifts
-LRAS shifts when technology and economic growth (same thing as outward PPC curve)
-Cyclical does not happen during full employment 
-The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates
-There is trade off between inflation and unemployment that only occurs in the short run
-Inflation and unemployment are inverse
-SRPC has relevance to Okun's Law
-Since wages are sticky, inflation changes move the points on the SRPC
-If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upward which causes a situation called stagflation
-If inflation expectations drop due to new tech or economic growth, then SRPC moves downward
-Shift in PC is caused by determinants of AS
-If it is AD it moves ALONG the curve
-AS shocks cause both rate of inflation and rate of unemployment to increase
-Supply shocks are a rapid and significant increase in resource cos
-Misery index is a combo of inflation and unemployment in any given year. 

The Long-Run Phillips Curve (LRPC)

• Because the LRPC exists at the natural rate of unemployment (Un), structural changes in the economy that affect Un will also cause LPRC to shift
• Increase in Un shifts LPRC right
• Vice versa