Phillips Curve Flashcards
Define the Phillip’s curve
The Phillips curve is an economic theory that inflation and unemployment will have a trade off.
What are the axis on the Phillip’s curve?
Y-axis is Inflation Rate
X-axis is the Unemployment Rate
Define the NAIRU
the non-accelerating inflation rate of unemployment, is the lowest level of unemployment that can occur in the economy before inflation starts to inch higher..
What are the factors that cause the NAIRU to change
An increase in trade union power upward shift in the target real wage curve
An increase in labour skill upward shift in the target real wage curve
Increased supply of childcare reduces NAIRU
Greater flexibility in the labour market
What do classical economists believe the only way to reduce the NAIRU is
According to classical economists the only way to reduce the NAIRU is to adopt supply side policies
What are the beliefs of new classical economists on the short run Philips curve
New classical economists believe that the short run Phillips curve does not exist due to economic agents are able to see whether inflation and unemployment are likely to rise or fall in the future (news, tv, internet)
Define Money illusion
Money illusion is an economic theory where people don’t take inflation and other factors into account when calculating their wealth.
What are the beliefs of Keynesian economists on the natural rate of unemployment
Keynesians doubt the existence of the natural rate of unemployment as they believe it takes a very long time for labour markets to clear if there is mass unemployment (sticky wages).
How can the phillips curve be shifted?
Supply-side policies to reduce structural unemployment.
What affect will an increase in wages and AD have on the SRPC
Movement up along the SRPC then Shift outwards of the SRPC
What causes the long run phillips curve to shift
Changes in demographic, productivity
