phillips curve Flashcards
what does the short run phillips curve show
a negative relationship between inflation and unemployment, as unemployment decreases, inflation increases
what happens when unemployment is low to produce inflation
workers have more leverage, increasing wages and demands for goods and services
workers have more barganing power
consumers have more disposable income - demand pull inflation
firms have higher costs, therefore consumers costs increase - cost push inflation
what happens when unemployment increases, affect on inflation
workers will have reduced barganning power
firms can offer lower wages, therefore lower prices for consumers
alternatively firms could keep existing prices and increase profits, rewarding the government, shareholders, or business expansion
what is the Keynesian perspective
supports the view of a stable short-run trade-off between inflation and unemployment, advocating for active fiscal and monetary policies to manage economic cycles
what is the monetarist perspective
emphasizes the role of inflation expectations and argues that the trade-off is only short-term. long-term policies should focus on controlling inflation through monetary policy
how does the phillips curve change from short run to long run
it is vertical, meaning that in the long run, there is no trade off between inflation and unemployment
why is the long run phillips curve verticle
over time, workers and firms adjust their expectations about inflation. as they anticipate higher inflation, they demand higher wages or adjust prices, which means workers are made redundant and neutralises the impact of monetary policy on unemployment.
the SR phillips curve will therefore ashift outwards, back to the original level of unemployment, but at a higher level of inflation
more intervention is put into reducing unemployment and this process continues to happen
this creates the natural rate of unemployment (NAIRU)
intervention to reduce unemployment will be ineffective, as the economy will always return to its natural rate of unemployment and will cause inflation to accelerate
