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The Long-run Phillips Curve
SR to LR Phillips Curve
LR vertical Phillips Curve
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Disinflation:
LR vertical Phillips Curve
- In the long run, there is NO tradeoff between inflation and unemployment as is in the short run Phillips Curve.
- Any rate of inflation is consistent with the NRU - Increase in AD beyond NRU → temporarily boost profits, output, employment → nominal wages increase → profits fall → back to original level of unemployment
- Therefore, the Long Run Phillips Curve is VERTICAL, with only a movement along it (changes in the price level).
- When the inflation rate of an economy is left unchecked, it will continually rise.
- Rising prices--> workers demand higher wages-->AS decreases-->inflation increases-->unemployment increases-->because there are so many people looking for jobs, wages decrease-->unemployment decreases-->AS increases-->inflation decreases
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Disinflation:
- Disinflation: Reductions in the inflation rate from year to year, which can be seen in the long-run Phillips Curve
- Assume inflation falls from 9% expected rate to 6%.
- Business profits fall as prices are rising less rapidly than wages
- Nominal wages increase
- Firms then reduce employment and so unemployment increases
- In the short run, profits fall and the unemployment rate increases
- Firms and workers will then adjust to the 6% inflation, profits are restored, employment rises, and unemployment falls back to the natural rate
- This is a decrease in inflation rates , it differs from deflation (an actual drop in the price level).
- This also occurs when aggregate demand declines
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Latest page update: made by anqxl
, May 7 2008, 8:29 AM EDT
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