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. Single digit misery is good.

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