The Phillips Curve History of the Phillips Curve

The Phillips Curve

History of the Phillips Curve A. W. Phillips wrote a journal article in 1958 for the Economica He examined almost 70 yrs of data in the UK From his research he found a relationship between unemployment and wage rates He determined that when unemployment was low wages were high a vice-versa (inverse relationship) From that study economist determined that a inverse relationship exist between inflation and unemployment

Comparing the AD/AS Model & the Phillips Curve

Short Run Phillips Curve The short run Phillips Curve is downward sloping because in the short run there is an inverse relationship between inflation and unemployment

Short Run Phillips Curve Link to Aggregate Demand When AD increase unemployment decreases and price level increases This causes a movement along the short run Phillips Curve

Short Run Phillips Curve Link to SRAS The short run Phillips Curve is a mirror image of the SRAS When the SRAS shifts, the short run Phillips curve will shift However, the SR Phillips Curve shifts in the opposite direction, and vice-versa

Short Run Phillips Curve Reasons for a shift in the SR Phillips Curve 1. Negative Supply Shock (anything that decreases SRAS) 2. Positive Supply Shock (anything that increases SRAS) 3. Expected inflation An increase in AD cause price level to increase Eventually wages and input cost are no longer sticky That will cause a decrease in SRAS SR Phillips curve will increase

Long Run Phillips Curve The LR Phillips Curve is a mirror image of the LRAS • Where the economy is at full employment In the Long Run there is no relationship between Inflation and Unemployment • Eventually our economy hits the Non. Accelerating Rate of Unemployment

Long Run Phillips Curve The LR Phillips Curve shifts whenever the LRAS shifts However, it is in the opposite direction

Challenges to the Phillips Curve The Phillips Curve has been challenged since the late 1970’s/early 1980’s What Happened? STAGFLATION Both inflation and unemployment increased during that time disproving the inverse relationship between inflation and unemployment Also in the 1950’s & 1990’s we had years where both inflation and unemployment decreased

AD/AS Model & the Phillips Curve

Draw a properly labeled AD/AS Model & Phillips Curve for each of the following: 1) An increase in AD. 2) A decrease in AD. 3) A decrease in SRAS. 4) An increase in SRAS. 5) An increase in the LRAS. 6) A decrease in the LRAS.