© 2007 Thomson South-Western Phillips Curve. © 2007 Thomson South-Western The Phillips Curve...

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© 2007 Thomson South-Western Phillips Curve

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Slide 1Short Run Phillips Curve
PC below the x axis (negative)
© 2007 Thomson South-Western
The Phillips Curve
LRPC is at the Natural Rate of Unemployment
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in the long run.
© 2007 Thomson South-Western
How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply
Quantity
Unemployment
Rate
0
Inflation
Rate
at their natural rates.
Expectations
Expected inflation measures how much people expect the overall price level to change.
© 2007 Thomson South-Western
Unemployment
Rate
0
short-run Phillips curve . . .
inflation rises, and the short-run
Phillips curve shifts to the right.
C
B
A
Supply Shocks and the PC
A supply shock is an event that directly alters the firms’ costs, and, as a result, the prices they charge.
This shifts the economy’s aggregate supply curve. . .
. . . and as a result, the Phillips curve.
© 2007 Thomson South-Western
Quantity
Unemployment
Rate
0
Inflation
Rate