The Phillips Curve Shows tradeoff between inflation and

The Phillips Curve Shows tradeoff between inflation and unemployment. What happens to inflation and unemployment when AD increases?

In general, there is an inverse relationship between unemployment and inflation

Short Run Phillips Curve When the economy is overheating, there is low unemployment but high inflation Inflation When there is a recession, unemployment is high but inflation is low 5% 1% SRPC 2% 9% Unemployment

Short Run Phillips Curve What happens when AS falls causing stagflation? Increase in unemployment and inflation Inflation 5% SRPC 2 1% SRPC 1 2% 9% Unemployment

Short Run vs. Long Run n the long run there is no tradeoff between inflation and unemployment. (Wag are flexible and adjust to changing price levels. ) Inflation Long Run Phillips Curve 5% The LRPC is vertical at the Natural Rate of Unemployment 3% 1% SRPC 2% 5% 9% Unemployment

AD/AS and the Phillips Curve

AD/AS and the Phillips Curve Show what happens on both graphs if AD increases Price Level LRAS Inflation LRPC AS PLe AD 2 SRPC AD 1 QFE GDPR NRU Unemp.

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls? Price Level LRAS Inflation LRPC AS PLe SRPC AD 1 AD 2 QFE GDPR NRU Unemp.

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC at full employment. What happens when AS falls? Price Level LRAS AS 2 Inflation LRPC AS 1 PLe SRPC 2 SRPC 1 AD QFE GDPR NRU Unemp.

AD/AS and the Phillips Curve Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up? Price Level PLe LRAS AS 1 Inflation LRPC AS 2 SRPC 1 AD QFE GDPR SRPC 2 NRU Unemp.