1. The Phillips Curve Ct’d
AP Macroeconomics

2. Where did we come from?
In a previous lesson, we looked at the relationship between inflation and unemployment, and introduced something called the Phillips Curve.

3. Phillips what?
The Phillips Curve is an empirical relationship founded by A.W. Phillips that shows the relationship between the unemployment rate and the rate at which wages change.
He discovered that changes in wages were inversely related to the unemployment rate.
Research since established the same relationship between inflation and unemployment.

4. Today…
We’ll continue that discussion and engage in more in-depth analysis.

5. Guesstimate…
What will happen if people expect the AD curve to increase and adjust their wages accordingly (so, increase in wages), but in reality, AD does not increase?
1) First, the SRAS will shift to SRAS1 because of the increase in the nominal wage rate.

6. Short-Run Phillips Curve
AD and SRAS and Short Run Phillips Curve
Point A is the expected inflation rate – natural unemployment rate point
The economy moves to a point like A3 in both figures, where the economy is below full employment (high unemployment) or the natural rate of employment and the inflation rate.
Unit 5: Macroeconomics Visual 5.4

7. Summary, please?
The short-run Phillips curve was drawn given an expected rate of inflation and a specific natural unemployment rate.
The SPRC will shift rightward if the expected inflation rate increases (this occurred in the 1970s—this causes a higher level of unemployment at any given rate of inflation).
The SPRC will shift leftward if the natural rate of unemployment decreases.

8. FYI…
Remember that the whole concept behind the SRPC is that policy makers are faced with choices:
Accept high inflation in exchange for low unemployment or
Accept low inflation in exchange for high unemployment.
NEITHER SOUNDS TOO APPEALING, RIGHT?

9. GOOD NEWS! (but you won’t be tested on it)
It is not possible to achieve lower unemployment in the long run by accepting higher levels of inflation.
This brings us to the Long-run Phillips Curve…a vertical curve.
In a nutshell, the LRPC is the relationship between unemployment and inflation after expectations of inflation have had time to adjust to monetary and fiscal policy. In essence, over time things equalize.

10. And now… Some resources: Reffonomics: http://www.reffonomics.com/
Morton workbook: Activity 46, Optional: Module 34 pp

11. Works Cited Economics of Seinfeld. http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.
Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, Print.
Reffonomics.