15. Economic Performance - Conflicting Macroeconomic Objectives Flashcards
What is the Phillips curve?
A graph showing the relationship and trade-off between inflation and unemployment. (macro policy objectives)
What is the short-run Phillips curve and how was it formed?
The s-run Phillips curve was formed after studying data spanning over 95 years - the curve is a curved l-shape and shows that as unemployment falls inflation rises, and vice versa.
What causes the gradient of the curve to vary at each end and what effect does this have?
At the left hand side of the curve the gradient is very steep, the right side is very shallow, this means an equal more left will create far more inflation on the left side than the right. The reason the gradient varies is because the level of spare capacity, it is much less on the left-side.
What determines the position of the curve?
Inflationary Expectations - high inflationary expectations will shift the curve right and low expectations will shift it left.
What was the key criticism of the Phillips curve?
It couldn’t account for periods of simultaneously high inflation and unemployment - stagflation. The model said it was either one or the other.
How was the Phillips curve model adapted after the criticism?
It was after this criticism that the idea of shifting the curve came into play - it was now possible to see high inflation and unemployment if the curve was shifted to the right.
What was a second key criticism of the Phillips curve model and how was it adapted afterwards?
The model didn’t show an equilibrium level of unemployment the economy would return to. The model was adapted to include a NAIRU - Non-Accelerated Inflation Rate of Unemployment. This was essentially a long-run Phillips curve.
What is the NAIRU linked to and how does it show the natural rate of unemployment?
The NAIRU is linked to the LRAS and the PPF - if the LRAS/PPF shifts out the economies productive potential increases - AD rises so the NAIRU shifts in. Unemployment rates will always revert back to the NAIRU in the following way;AD rises - shift left up the SRPC - inflations rises and ue falls - ppl temporarily feel richer due to money illusion but eventually realise inflation means there real incomes are falling - workers will then revise there inflationary expectations and demand higher wages - causes the the SRPC to shift right - end up back at NAIRU
NOTE: SEE PHILLIPS CURVE DOCUMENT IN FOLDER FOR FURTHER EXPLANATION
NOTE: SEE PHILLIPS CURVE DOCUMENT IN FOLDER FOR FURTHER EXPLANATION
