Phillips Curve

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natural rate hypothesis
the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
supply shock
an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve
sacrifice ratio
the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
rational expectations
the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future
misery index
the sum of inflation and unemployment
short run aggregate supply
there is a trade-off between inflation and unemployment in the short run, but at a cost:
-rising price level
-lower output -> higher unemployment
phillips curve
a curve that shows the short-run trade-off between inflation and unemployment
low unemployment correlates with ___________
high aggregated demand
Causes of shifts (4)
-Money supply
-Government spending
-Taxes
-Expected inflation
Short run phillips curve
the negative short-run relationship between the unemployment rate and the inflation rate
long run phillips curve
the Phillips Curve after all nominal wages have adjusted to changes in the rate of inflation; a line emanating straight upward at the economy's natural rate of unemployment
What would shift the LRPC?
Policy change; ex: minimum wage laws, collective bargaining laws, unemployment insurance, job-training programs
unemployment rate=
natural rate of unemployment-a (actual inflation-expected inflation)
Shifts in phillips curve
supply shock- causes unemployment and inflation to rise (ex: world's supply of oil decreased)
Cost of reducing inflation (3 main points)
-disinflation: reducuction in the rate of inflation
-sacrifice ratio
-to reduce inflation, the nation must endure a period of high unemployment and low output
low inflation and unemployment
-declining commodity prices
-labor-market changes
-technological advance
moving along phillips curve is a shift in ___________
Aggregated demand (AD)
monetary policy could only temporarily reduce ________
unemployment. (returns to natural rate eventually)
A.W. Phillips
found an empirical way of verifying the keynesian monetary policy based on BR data....the phillips curve
Milton Friedman and Edmund Phelps came up with the idea of ___________
Natural Rate of Unemployment. (Shift in monetary policy will just move up the LRAS)
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