# data[].attributes.attachment_link.title
DAY 5 PROBLEM SET Phillips Curve (ANSWERS).pdf

# data[].attributes.attachment_link.title
AP Macroeconomics: 5.2 The Phillips Curve

# data[].attributes.body
Define (using graphs as appropriate) the short-run Phillips curve and the long-run Phillips curve.

Explain (using graphs as appropriate) short-run and long-run equilibrium in the Phillips curve model.

Explain (using graphs as appropriate) the response of unemployment and inflation in the short run and in the long run.

# data[].attributes.body
The Phillips curve model is used to represent the relationship between inflation and unemployment and to illustrate how macroeconomic shocks affect inflation and unemployment.

# data[].attributes.body
The short-run trade-off between inflation and unemployment can be illustrated by the downward-sloping short-run Phillips curve (SRPC).

An economy is always operating somewhere along the SRPC.

The long-run relationship between inflation and unemployment can be illustrated by the long-run Phillips curve (LRPC), which is vertical at the natural rate of unemployment.

Long-run equilibrium corresponds to the intersection of the SRPC and the LRPC.

Points to the left of long-run equilibrium represent inflationary gaps, while points to the right of long-run equilibrium represent recessionary gaps.

Demand shocks correspond to movement along the SRPC.

Supply shocks correspond to shifts of the SRPC.

Factors that cause the natural rate of unemployment to change will cause the LRPC to shift.

# data[].attributes.attachment_link.title
APMac Unit 5 Lesson 4 - The Phillips Curve

# data[].attributes.attachment_link.description
Start studying APMac Unit 5 Lesson 4 - The Phillips Curve. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

# data[].attributes.attachment_link.description
You understand that when using the FRED® Dashboard, you may be exposed to user submissions from a variety of sources. You further understand and acknowledge that you may be exposed to user submissions that are inaccurate, offensive, indecent, or objectionable.

# data[].attributes.headline
Is the Phillips Curve dead or just hiding?

# data[].attributes.subject
Is the Phillips Curve dead or just hiding?

# data[].attributes.attachment_link.title
Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or is it just Hibernating?

# data[].attributes.attachment_link.description
Slides presented at the 2019 U.S. Monetary Policy Forum New York, New York

# data[].attributes.attachment_link.readable_text
subscribe to Planet Money podcast

The Phillips Curve measures the relationship between inflation and unemployment. And the Curve predicts that when unemployment is low, inflation tends to rise. Conversely, If unemployment goes up, then inflation should come down. Because then companies don't have to raise wages to compete for workers.

Right now, though, the Phillips Curve doesn't seem to be working as a predictive instrument. The Friday jobs report was awesome. We added 312,000 jobs, wage growth is strong, and unemployment is still below 4%, and has been for a while. Phillips Curve fans should be running up the inflation red flags right about now, and yet the Federal Reserve, and Chairman Powell in particular, say they're not worried.

Why is that? Is the Phillips Curve dead? Did Paul Volcker kill it, back in the 70s and 80s? Or is it just in hibernation? Cardiff and Stacey spoke to some of the biggest economic minds in the business at the American Economics Association conference in Atlanta over the weekend, to get their takes.

# data[].attributes.attachment_link.description
subscribe to Planet Money podcast The Phillips Curve measures the relationship between inflation and unemployment. And the Curve predicts that when unemployment is low, inflation tends to rise. Conversely, If unemployment goes up, then inflation should come down. Because then companies don't have to raise wages to compete for workers.

# data[].attributes.body
1. What is the relationship between inflation and unemployment?

2. What is the relationship between SRAS and SRPC?

3. What is the relationship between SRPC and changes in AD?

4. What is the relationship between inflation and unemployment in the long run?

# data[].attributes.attachment_link.readable_text
Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand.

If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation.

Inflation - a sustained increase in the price level.

Demand-pull inflation - inflation caused by AD increasing faster than AS.

Demand-pull inflation means:

Excess demand and 'too much money chasing too few goods.'

The economy is at full employment/full capacity.

The economy will be growing at a rate faster than the long-run trend rate.

A falling unemployment rate.

How demand-pull inflation occurs

If aggregate demand is rising at 4%, but productive capacity is only rising at 2.5%; firms will see demand outstripping supply. Therefore, they respond by increasing prices.

Also, as firms produce more, they employ more workers, creating a rise in employment and fall in unemployment. This increased demand for workers puts upward pressure on wages, leading to wage-push inflation. Higher wages increase disposable income of workers leading to a rise in consumer spending.

Economic growth and long-run trend rate

The long trend rate of economic is the sustainable rate of economic growth; it is the rate of economic without any demand-pull inflation. If economic growth exceeds this long-run trend rate, then it will cause inflationary pressures.

In a boom, growth is above the long-run trend rate, and it is in this situation where we will get demand-pull inflation.

Causes of demand-pull inflation

Lower interest rates. A cut in interest rates causes a rise in consumer spending and higher investment. This boost to demand causes a rise in AD and inflationary pressures.

The rise in house prices. Rising house prices create a positive wealth effect and boost consumer spending. This leads to a rise in economic growth.

Rising real wages. For example, unions bargaining for higher wage rates.

Devaluation. Devaluation in the exchange rate increases domestic demand (exports cheaper, imports more expensive). Devaluation will also cause cost-push inflation (imports more expensive)

Demand pull inflation and Phillips Curve

Demand pull inflation can also be shown on a Phillips Curve. A rise in demand causes a fall in unemployment (from 6% to 3%) but an increase in inflation from inflation of 2% to 5%.

Examples of demand pull inflation

From 1986, inflation increased to 1991. This was an example of demand pull inflation.

The inflation of the late 1970s was due primarily to cost-push factors (wages/oil prices of 1970s)

UK 1980s-91.

The quarterly growth rate in the UK.

During the late 1980s, the rate of economic growth in the UK rose to over 4%. The high rate of economic growth was caused by demand side factors, such as:

Rising house prices

Cut in real interest rates

Cut in income tax rates.

Rise in consumer confidence

The rapid growth in demand saw inflationary pressures increase.
US late 1960s
US Inflation: St Louis Fed

Rapid economic growth in the mid-1960s, caused inflation to increase from 2% in 1966 to 6% by 1970.

Demand pull inflation and other types of inflation

Demand pull inflation could occur with:

Cost-push inflation (rising costs of production). For example, in the early 1970s, economic growth and rising oil prices caused a spike in US inflation of 12% by 1974.

Built-in inflation. Inflation has its own momentum. High inflation in previous years, makes future inflation more likely as firms put up prices in anticipation of repeated inflation.

Decline of demand pull inflation

In recent years, demand-pull inflation has become quite rare. The small rises in inflation (2008/2001) were primarily due to cost-push factors. In recent decades, we have not witnessed any significant demand-pull inflation. this is due to several factors

Independent Central Banks responsible for monetary policy and keeping inflation to target of 2%

Secular stagnation. Lower rates of economic growth

Downward pressure on prices from the global economy. Deflation of manufactured goods in Asia.

New technology leading to lower prices.

See also: fall in global inflation

Related

# data[].attributes.attachment_link.description
Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand. If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation. Inflation - a sustained increase in the price level. Demand-pull inflation - inflation caused by AD increasing faster than AS.