phillips curve Flashcards
15 marker
intro: phiillips curve is an econ model tahts shows rs between possible unemplyment and infalation. nairu is the level of unemplyment below which the rate of inflarion may be eccepected to accelareate sihgnificantly
para 1: srpc resprensts the rs in the short run. shift in srpc represnts a change in expectation of inflation, when unluymet is low infaltion tends to be high, thi is because when un is low employersare in comp for a limited amaount of workers, they will have to poffer higher wages, as wages rise the cost of gand s also rises causing an invrese ij infaltion, where when un is low employers can choose who to slecet and do not have to oeffer higher wages to attarct , this reduces inflt pressure, if ppl excpect higher inflt then inflt will be higher for a given rate of un.
An increase in aggregate demand (AD to AD2) causes higher real GDP (Y1 to Y2). Therefore firms employ more workers and unemployment falls.
However, as the economy gets closer to full capacity, we see an increase in inflationary pressures. With lower unemployment, workers can demand higher money wages, which causes wage inflation. Also, firms can put up prices due to rising demand.
Therefore, in this situation, we see falling unemployment, but higher inflation.
as employm falls wage pressure starsr to rise, increase in wage inflation and faster rise in prices, inft rise and ir uncreased
para 2: arguedt that there is no trade off between both un and inf,
increse in size of econ from ad1 to ad2, leads tro inflt pressure, increase cost of produ tyion from p1 to p2 ,, output increas4s and increased demand auses derived demand for labour , overtime workers will adjust to expectations, and demand higgher wages increasing cost of production, decreasing sras , causes inflt pressure takes econ back to yfe, leads t increase of the srpc, employmnet back to nru, ecomn operating at point c of phi;lip curve , this creatres the long run outcome, with inft ant nru, points a and c joined, creating lrpc, all factors of prod are being utilised, at lrpc nru inflt is stable in the lr if there are no external shocks or excuseove demand poloicy
para 3: Monetarists argue that if there is an increase in aggregate demand, then workers demand higher nominal wages. When they receive higher nominal wages, they work longer hours because they feel real wages have increased. (their price expectations are based on last year)
However, this increase in AD causes inflation, and therefore, real wages stay the same. When they realise real wages are the same as last year, they change their price expectations, and no longer supply extra labour and the real output returns to its original level. Therefore, unemployment remains unchanged, but we have a higher inflation rate. The short-run Phillips curve shifts upwards to SRPC 2
