Unit 5&6 Notes: 4.2.2015

Phillips Curve: Represents the relationship between inflation and unemployment.
The trade off between inflation and unemployment only occurs in the Short Run.

Long Run Phillips Curve occurs at Natural Rate of Unemployment. (4%-5%)
If Nat. Rate of Unemployment change, LRPC will change. Represented by a vertical line. 
There is no trade off between unemlloent and inflation in the long run.  
LRPC will only shift if the LRAS Curve shifts.
NRU: Seasonal, Frictional, Structural

Major LRPC assumption is that more worker benefits create higher natural rate and fewer benefits create lower natural rates. Whatever changes LRAS will change LRPC.

Short Run Phillips Curve: LRPC
There is an inverse relationship between inflation and unemployment.
Relevance to Okuns Law. 
Since wages are sticky inflation changes move point on SRPC. If inflation persist and expected rate of inflation rise, then entire SRPC moves upward which cause stagflation.

If inflations expectations drop due to new technology or economic growth then SRPC will move downward.

Aggregate supply drops can cause higher rates of inflation and unemployment.

Supply Drop will cause rapid increase in resource cost.

Misery Index: combination of unemployment and inflation in any given year. Single digit misery is good.