In this lesson summary review and remind yourself of the key terms and graphs related to the Phillips curve. Topics include the short-run Phillips curve (SRPC), the long-run Phillips curve, and the relationship between the Phillips' curve model and the AD-AS model.
Log in Ram Agrawal 5 years agoPosted 5 years ago. Direct link to Ram Agrawal's post “Why do the wages increase...” Why do the wages increase when the unemplyoment decreases? • (3 votes) Pierson 5 years agoPosted 5 years ago. Direct link to Pierson's post “I believe that there are ...” I believe that there are two ways to explain this, one via what we just learned, another from prior knowledge. From prior knowledge: if everyone is looking for a job because no one has one, that means jobs can have lower wages, because people will try and get anything. The opposite is true when unemployment decreases; if an employer knows that the person they are hiring is able to go somewhere else, they have to incentivize the person to stay at their new workplace, meaning they have to give them more money. From new knowledge: the inflation rate is directly related to the price level, and if the price level is generally increasing, that means the inflation rate is increasing, and because the inflation rate and unemployment are inversely related, when unemployment increases, inflation rate decreases. In other words, since unemployment decreases, inflation increases, meaning regular inputs (wages) have to increase to correspond to that. (16 votes) wcyi56 5 years agoPosted 5 years ago. Direct link to wcyi56's post “"When people expect there...” "When people expect there to be 7% inflation permanently, SRAS will decrease (shift left) and the SRPC shifts to the right." "When people expect there to be 3% inflation permanently, SRAS will increase (shift right) and the SRPC shifts to the left." Why? • (1 vote) melanie 5 years agoPosted 5 years ago. Direct link to melanie's post “If I expect there to be h...” If I expect there to be higher inflation permanently, then I as a worker am going to be pretty insistent on getting larger raises on an annual basis because if I don't my real wages go down every year. For the SRAS, this means that the cost of labor will be higher, and remember that an increase in the cost of a resource shifts the SRAS down. (11 votes) Natalia 3 years agoPosted 3 years ago. Direct link to Natalia's post “Is it just me or can no o...” Is it just me or can no one else see the entirety of the graphs, it cuts off • (6 votes) Baliram Kumar Gupta 6 years agoPosted 6 years ago. Direct link to Baliram Kumar Gupta's post “Why Phillips Curve is ver...” Why Phillips Curve is vertical even in the short run • (2 votes) Long Khan 6 years agoPosted 6 years ago. Direct link to Long Khan's post “Hello Baliram,I think y...” Hello Baliram, I think you meant the Long Run as the Short Run Phillips curve is not vertical! As for the reasons that the LRPC (long-run Phillips curve) is vertical it is because is equal to the the natural rate of unemployment in a given economy. (5 votes) Haardik Chopra 3 years agoPosted 3 years ago. Direct link to Haardik Chopra's post “is there a relationship b...” is there a relationship between changes in LRAS and LRPC? • (4 votes) evan 3 years agoPosted 3 years ago. Direct link to evan's post “Yes, there is a relations...” Yes, there is a relationship between LRAS and LRPC. This is because the LRPC is on the natural rate of unemployment, and so is the LRPC. Thus, a rightward shift in the LRAS line would mean a leftward shift in the LRPC line, and vice versa. (0 votes) cook.katelyn 6 years agoPosted 6 years ago. Direct link to cook.katelyn's post “What is the relationship ...” What is the relationship between the LRPC and the LRAS? • (1 vote) melanie 6 years agoPosted 6 years ago. Direct link to melanie's post “LRAS is full employment o...” LRAS is full employment output, and LRPC is the unemployment rate that exist (the natural rate of unemployment) if you make that output. For example, suppose you knew that full employment output in your economy is making 100 million widgets. Suppose you also know that if you make 100 million widgets, there will still be 4% unemployment. Then the LRAS is vertical at the value of 100 million widgets and the LRPC is vertical at 4% unemployment. (3 votes) Ceiti Anna 17 days agoPosted 17 days ago. Direct link to Ceiti Anna's post “In the "Common Mispercept...” In the "Common Misperceptions" section, I think there's a typo. It says that "Changes in the natural rate of unemployment shift the LRPC," but it's supposed to be that it shifts the "SRPC," because the intro to that point was talking about not confusing the difference between moving along and shifting the SRPC. Did anyone else see that? Pretty sure that needs to be fixed. • (1 vote) KyleKingtw1347 5 years agoPosted 5 years ago. Direct link to KyleKingtw1347's post “Why is the x- axis unempl...” Why is the x- axis unemployment and the y axis inflation rate? • (0 votes) melanie 5 years agoPosted 5 years ago. Direct link to melanie's post “Because the point of the ...” Because the point of the Phillips curve is to show the relationship between these two variables. There is no hard and fast rule that you HAVE to have the x-axis as unemployment and y-axis as inflation as long as your phillips curves show the right relationships, it just became the convention. But stick to the convention. It just looks weird to economists the other way. (2 votes) Remy 5 years agoPosted 5 years ago. Direct link to Remy's post “What happens if no policy...” What happens if no policy is taken to decrease a high unemployment rate? • (1 vote) Michelle Wang Block C 4 years agoPosted 4 years ago. Direct link to Michelle Wang Block C's post “Hi Remy, I guess "high un...” Hi Remy, I guess "high unemployment" means an unemployment rate higher than the natural rate of unemployment. In that case, the economy is in a recession gap and producing below it's potential. which means, AD and SRAS intersect on the left of LRAS. Then if no government policy is taken, The economy will gradually shift SRAS to the right to meet the long-run equilibrium, which is the LRAS and AD intersection. (1 vote) kislay 6 years agoPosted 6 years ago. Direct link to kislay's post “"An economy is initially ...” "An economy is initially in long-run equilibrium at point X, but a decrease in aggregate demand increases unemployment and decreases inflation, resulting in the move to point Y. When people expect there to be 3% inflation permanently, SRAS will increase (shift right) and the SRPC shifts to the left. " if there is low demand, why there will be increase in supply in short term. It makes sense to scale back supply there is low demand, which will lead to aggregate supply shifting left. • (1 vote) Andrew M 6 years agoPosted 6 years ago. Direct link to Andrew M's post “If people know their mone...” If people know their money will be worth less in the future, they will tend to spend more of it now. (1 vote)Want to join the conversation?
Eventually the SRAS shifts enough that the economy returns to long-run equilibrium. And that means the unemployment rate returns to the natural rate of unemployment, but notice that there is a new, higher price level! The "new normal" for the economy is the same old natural rate of unemployment, but a higher permanent rate of inflation. So, next time there is a recession and the unemployment rate increases and inflation decreases, it will be at a higher rate then whatever the "old normal" was before. The new SRPC reflects that.
