Phillips curve
Economics
Business
Examples of Phillips curve in the following topics:
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The Relationship Between the Phillips Curve and AD-AD
- Changes in aggregate demand cause movements along the Phillips curve, all other variables held constant.
- The Phillips curve shows the inverse trade-off between rates of inflation and rates of unemployment.
- The Phillips curve and aggregate demand share similar components.
- These two factors are captured as equivalent movements along the Phillips curve from points A to D.
- This illustrates an important point: changes in aggregate demand cause movements along the Phillips curve.
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The Short-Run Phillips Curve
- The short-run Phillips curve depicts the inverse trade-off between inflation and unemployment.
- The Phillips curve depicts the relationship between inflation and unemployment rates.
- However, the short-run Phillips curve is roughly L-shaped to reflect the initial inverse relationship between the two variables .
- During the 1960's, the Phillips curve rose to prominence because it seemed to accurately depict real-world macroeconomics.
- The short-run Phillips curve shows that in the short-term there is a tradeoff between inflation and unemployment.
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The Phillips Curve
- The Phillips curve relates the rate of inflation with the rate of unemployment.
- The early idea for the Phillips curve was proposed in 1958 by economist A.W.
- The theory of the Phillips curve seemed stable and predictable.
- They do not form the classic L-shape the short-run Phillips curve would predict.
- Review the historical evidence regarding the theory of the Phillips curve
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Shifting the Phillips Curve with a Supply Shock
- The Phillips curve shows the relationship between inflation and unemployment.
- In the 1960's, economists believed that the short-run Phillips curve was stable.
- By the 1970's, economic events dashed the idea of a predictable Phillips curve.
- Consequently, the Phillips curve could not model this situation.
- Give examples of aggregate supply shock that shift the Phillips curve
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The Long-Run Phillips Curve
- The Phillips curve shows the trade-off between inflation and unemployment, but how accurate is this relationship in the long run?
- To get a better sense of the long-run Phillips curve, consider the example shown in .
- This is shown as a movement along the short-run Phillips curve, to point B, which is an unstable equilibrium.
- The reason the short-run Phillips curve shifts is due to the changes in inflation expectations.
- Examine the NAIRU and its relationship to the long term Phillips curve
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Disinflation
- The Phillips curve can illustrate this last point more closely.
- Consider an economy initially at point A on the long-run Phillips curve in .
- The expected rate of inflation has also decreased due to different inflation expectations, resulting in a shift of the short-run Phillips curve.
- Disinflation can be illustrated as movements along the short-run and long-run Phillips curves.
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Relationship Between Expectations and Inflation
- The short-run Phillips curve is said to shift because of workers' future inflation expectations.
- To connect this to the Phillips curve, consider .
- As an example of how this applies to the Phillips curve, consider again.
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Employment Levels
- The Phillips curve tells us that there is no single unemployment number that one can single out as the full employment rate.
- Ideas associated with the Phillips curve questioned the possibility and value of full employment in a society: this theory suggests that full employment—especially as defined normatively—will be associated with positive inflation .
- Short-run Phillips curve before and after Expansionary Policy, with long-run Phillips curve (NAIRU).
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Alternative Views
- Phillips Curve: Another important model following Keynes's publications is the Phillips Curve, put forward by William Phillips in 1958.
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Curve Sketching
- Curve sketching is used to produce a rough idea of overall shape of a curve given its equation without computing a detailed plot.
- Determine the symmetry of the curve.
- If the exponent of $x$ is always even in the equation of the curve, then the $y$-axis is an axis of symmetry for the curve.
- Determine the asymptotes of the curve.
- Also determine from which side the curve approaches the asymptotes and where the asymptotes intersect the curve.