紅石國際教育中心. Red Rock Institute & Publishing

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1 紅石國際教育中心 Red Rock Institute & Publishing

2 Phillips Curve LRAS Inflation. B.. A C PL1 PL2 AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 The Short-Run Phillips Curve illustrates the Trade-off between Inflation and Unemployment (derived from what is happening to RGDP) that occurs as the AD curve traverses (either up or down) the UPWARD sloping (Intermediate) range of.

3 Phillips Curve LRAS Inflation. B.. A C PL1 PL2 AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 IMPORTANT---Movement ALONG the corresponds with AD movement ALONG the Upward Sloping (Intermediate Range) of the Curve. The Phillips Curve is important because for A long time post WWII Fiscal Policy (FP) and Monetary Policy (MP)wasdriven by this relationship between inflation and unemployment

4 Phillips Curve

5 Phillips Curve LRAS Inflation. B.. A C PL1 PL2 AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 If Unemployment was the problem then policy makers (FP and MP) INCREASED AD to DECREASE unemployment, but this tended to create INFLATION.

6 Phillips Curve LRAS Inflation. B.. A C PL1 PL2 AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 Or If Inflation was the problem then policy makers (FP and MP) DECREASED AD to DECREASE Inflation, but this tended to create Unemployment.tackling the evil of the Day tended to make the other evil worse

7 Phillips Curve LRAS Inflation. B.. A C PL1 PL2. AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 Let s look at Point A on the ---Notice it corresponds with the and FE GDP* Which also represents the economy at is normal Long Run Equilibrium State Remember-LRAS represents POTENTIAL, LONG TERM RGDP. At FE RGDP the unemployment rate is the Natural Rate of Unemployment. In the LONG RUN no matter how much AD increases will ALWAYSCome up against the wall of LRAS NO MATTER WHAT THE PRICE LEVEL IS!!

8 Phillips Curve LRAS Inflation. B.. A C PL1 PL2. AD AD AD1 Unemployment Real GDP RDP2 FE RGDP1 So if in the LONG RUN the Unemployment Rate stays at the Natural Rate of Unemployment REGARDLESS of the PRICE LEVEL, what to you think the LONG RUN PHILLIPS CURVE is going To look like??

9 Phillips Curve Inflation 10% 0%. LRPC B.Ạ C (5%) Unemployment The LONG RUN PHILLIPS CURVE (LRPC) is VERTICAL at the Natural Rate of Unemployment!! NO MATTER WHAT THE INFLATION RATE IS THE STAYS THE SAME.. 10%

10 Phillips Curve LRAS Inflation LRPC π*. B.. A C. B AD Unemployment Real GDP FE IMPORTANT: Point A on the Phillips Curve represents the LONG RUN situation where INFLATIO Is going to be stable at (roughly 5%) AND Point B on the AD/AS graph represents the LONG RUN situation where AD = = LRAS (Long Run Equilibrium). Embedded in the concept of FE RGDP is the Unemployment rate is at it s Natural Rate (roughly 5%).

11 Phillips Curve LRAS Inflation LRPC π*. B.. A C B AD Unemployment Real GDP FE IMPORTANT: The Long Run Phillips Curve is NOTthe same thing as the LRAS!!! The ONLY thing They have in common is (LRPC Explicitly and LRAS Implicitly) isthe Natural Rate of Unemployment. The LRAS can shift without causing the to change AND/OR the LRPC can shift without the LRAS curve shifting.got THAT?

12 What SHIFTS the and the LRPC? The and LRPC are not static, they can shift left or right. is MARRIED to the curve on our AD/AS Model of the Economy WHATEVER shifts the curve causes the to shift as well. However they shift in OPPOSITE directions!!!

13 Phillips Curve LRAS 1 Inflation π*.a PL1 Unemployment Real GDP RGDP1 FE AD IMPORTANT: Lets assume the Economy experiences a NEGATIVE Supply Shock We know this is going to cause the curve to shift to the LEFT ( STAGFLATION )

14 Phillips Curve LRAS 1 Inflation π*.a. PL1 Unemployment 1 * Real GDP RGDP1 FE AD Look at our new equilibrium point on the AD/AS graph (red dot). At this new equilibrium point If AD increased or decreased it would do so at an inflation ratehigher relative to the previous Equilibrium point at ANY point on the new curve. On the Phillips Curve graph NOW at any unemployment rate the inflation rate is going to be HIGHER relative to * The SHORT RUN PHILLIPS CURVE shifts to the RIGHT!! Hint: shifts LEFT, shifts RIGHT.

15 Phillips Curve LRAS 1 Inflation π*.a. PL1 Unemployment 1 * Real GDP RGDP1 FE AD Look at our new equilibrium point on the AD/AS graph (red dot). At this new equilibrium point If AD increased or decreased it would do so at an inflation ratehigher relative to the previous Equilibrium point at ANY point on the new curve. On the Phillips Curve graph NOW at any unemployment rate the inflation rate is going to be HIGHER relative to * The SHORT RUN PHILLIPS CURVE shifts to the RIGHT!! Hint: shifts LEFT, shifts RIGHT.

16 Short Run Phillips Curve What do you think is going to happen to the in the event of a POSITIVE SUPPLY SHOCK??? curve shifts to the RIGHT and shifts to the LEFT!!!!

17 Phillips Curve IMPORTANT: Whenever causes the short run AS curve to shift INDEPENDENT of the LRAS curve is going to cause the Phillips Curve to shift as well. shifts RIGHT (positive supply shock) then the is going to shift to the LEFT shifts LEFT (negative supply shock) then the is going to shift to the RIGHT.

18 LONG RUN PHILLIPS CURVE What shifts the LONG RUN PHILLIPS CURVE? Changes in government benefits to the unemployed/underemployed Changes in the composition of the Labor force Changes in Supply-Side policies

19 Phillips Curve Inflation 10% LRPC LRPC1 0% 1 10% (5%) (7%) Unemployment Changes in Govt Benefits towards the UNEMPLOYED and the UNDEREMPLOYED If the Govt. INCREASES the benefits they pay to the unemployed/underemployed in general this produces a higher level of FRICTIONAL unemployment. People tend to stay Unemployed for longer periods of time because the replacement income they receive from the govt. is closer to their lost income In other words, the incentive to look for a Job is diminished and the tendency to stay unemployed increases.. The LONG RUN PHILLIPS CURVE SHIFTS TO THE RIGHT

20 Phillips Curve Inflation 10% LRPC1 LRPC 0% 1 10% (3%) (5%) Unemployment Changes in Govt Benefits towards the UNEMPLOYED and the UNDEREMPLOYED If the Govt. DECREASES the benefits they pay to the unemployed/underemployed in general this produces a lower level of FRICTIONAL unemployment. People tend to stay Unemployed for shorter periods of time because the replacement income they receive from the govt. is much LESS then their original income In other words, the incentive to look for a job is INCREASES and the tendency to stay unemployed DECREASES... The LONG RUN PHILLIPS CURVE SHIFTS TO THE LEFT

21 Frequency Annual Quarterly Time Q Q Q Country Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom i i i i i i i i i i i i i i i i i i i i i i i i i i

22 Why do some other major economies have persistently higher unemployment rates than the U.S. Government policies are a major culprit

23 We will use as an example a sub-topic from the #1 FRQ from the 2009 AP Macroeconomics Test

24 INFLATION LRPC LRAS 6% AD* RGDP UNEMPLOYMENT The INFLATION RATE currently is 6% and the Federal Reserve believes that is too HIGH. They decide to target 3% as a preferred level of Inflation.

25 INFLATION LRPC 6% AD* RGDP UNEMPLOYMENT In order to DECREASE INFLATION the Federal Reserve would carry out the Open Market Operation or SELLING BONDS---this will DECREASE the Money Supply and INCREASEthe FEDERAL FUNDS RATE and tend to INCREASE INTEREST RATES throughout the Financial System.

26 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 RGDP UNEMPLOYMENT INCREASING INTEREST RATES will cause AD to DECREASE

27 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 RGDP UNEMPLOYMENT REAL GDP will DECREASE AND PRICE LEVEL (inflation) will DECREASEAND Because RGDP DECREASES, UNEMPLOYMENT will INCREASE

28 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT INFLATION is DECREASING and UMEPLOYMENT IS INCREASING---There is MOVEMENT ALONG THE PHILLIPS CURVE IN THE SHORT RUN

29 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT The Economy settles at a LOWER INFLATION RATE and a HIGHER UNEMPLOYMENT RATE

30 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT NOTE: This is the situation in the SHORT-RUN ---What is the LONG-TERM EFFECT of the Federal Reserves action?

31 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT People (and business and govt) EXPECTIONS about INFLATION are now going to Be built-in ---They have expectations of LOWER PRICES AND WAGES.

32 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT This will affect a number of things BUT lets focus on WAGES

33 INFLATION LRPC 6% PL1 AD1 AD* RGDP1 3% RGDP UR1 UNEMPLOYMENT Because there are expectations of LOWER Inflation then WAGES tend to Stabilize and MAY decrease (assume this to be the case) On the AD/AS Graph, which curve is going to be affected???

34 INFLATION LRPC 1 6% PL1 PL2 AD* AD1 RGDP1 RGDP2 3% RGDP UR1 UNEMPLOYMENT Aggregate Supply!! Cost of Production will tend to DECREASE When C.O.P DECREASES then Aggregate Supply will INCREASE (Shift to the Right)

35 INFLATION LRPC 1 6% PL1 PL2 AD* AD1 RGDP1 RGDP2 3% RGDP UR1 UNEMPLOYMENT (inflation) has DECREASED and RGDP has INCREASED (back to the original FE FGDP* therefore UNEMPLOYMENT has DECREASED.

36 INFLATION LRPC 1 6% PL1 PL2 AD* AD1 RGDP1 RGDP2 3% RGDP UR1 UNEMPLOYMENT How does this affect the Phillips Curve??? When the curve shifts to the RIGHT The Short-Run Phillips Curve shifts to the LEFT!! Now at every level of UNEMPLOYMENT the PRICE LEVEL will be LOWER.

37 INFLATION LRPC 1 6% PL1 PL2 AD1 AD* 3% RGDP RGDP1 RGDP2 Economy is BACK to FE where AD = =LRAS We are STILL at the but at a LOWER I INFLATION RATE!! UR1 UNEMPLOYMENT With the shift of The Short Run Phillips Curve we move back to Long-Run Equilibrium where intersect LRPC at the.the LONG RUN PHILLIPS CURVE IS NOT GOING TO SHIFT.

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