Post on 22-Jan-2020
The Phillips Curve
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Chapter 3 Unit 35 Business, Computers,
& Information
Technology
The Phillips Curve
Shows tradeoff between inflation
and unemployment.
What happens to inflation and
unemployment when AD increase?
3
In general, there is an inverse relationship
between unemployment and inflation
Inflation
4
SRPC
Short Run Phillips Curve
Unemployment 2% 9%
1%
5%
When the economy is overheating, there is low unemployment but high inflation
When there is a recession, unemployment is high but
inflation is low
Inflation
5
SRPC
Short Run Phillips Curve
Unemployment 2% 9%
1%
5%
What happens when AS falls causing prices to increase and output to decrease (stagflation)?
Increase in unemployment and inflation
SRPC1
Inflation
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SRPC
Short Run vs. Long Run
Unemployment 2% 9%
1%
5%
What happens when AD increases?
SRPC1
3%
5%
Long Run Phillips Curve
In the long run, wages
and resource prices
increase. AS shifts to
the left. SRPC shifts
right.
What happens in the long run?
Inflation
7
Short Run vs. Long Run
Unemployment 2% 9%
1%
5%
3%
5%
Long Run Phillips Curve
In the long run there is no tradeoff between inflation
and unemployment
The LRPC is vertical at
the Natural Rate of
Unemployment
Inflation
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SRPC
Short Run vs. Long Run
Unemployment 2% 9%
1%
5%
What happens when AD falls?
SRPC1
3%
5%
Long Run
Phillips Curve
In the long run wages
fall and there is no
tradeoff between
inflation and
unemployment
What happens in the long run?
AD/AS and the
Phillips Curve
Price
Level
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AD
AS
AD/AS and the Phillips Curve
GDPR Qf
PLe
LRAS Inflation
SRPC
Unemployment
UY
LRPC
Show what happens on both graphs if AD increase
AD1
Price
Level
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AD
AS
AD/AS and the Phillips Curve
GDPR Qf
PLe
LRAS Inflation
SRPC
Unemployment
UY
LRPC
Correctly draw the LRPC and SRPC with the recessionary gap. What happens when AD falls?
AD1
Price
Level
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AD
AS
AD/AS and the Phillips Curve
GDPR Qf
PLe
LRAS Inflation
SRPC
Unemployment
UY
LRPC
Correctly draw the LRPC and SRPC at full employment. What happens when AS falls?
AS1
SRPC1
Price
Level
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AD
AS
AD/AS and the Phillips Curve
GDPR Qf
PLe
LRAS Inflation
SRPC
Unemployment
UY
LRPC
Correctly draw the LRPC and SRPC with an recessionary gap. What happens when AS goes up?
AS1
SRPC1
Price Level
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SRAS
GDPR Qf
LRAS Inflation
SRPC
Unemployment UY
LRPC
AD
Price Level
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SRAS
GDPR Qf
LRAS Inflation
SRPC
Unemployment UY
LRPC
AD2
AD3
PLe
AD
Price Level
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SRAS
GDPR Qf
LRAS Inflation
SRPC
Unemployment UY
LRPC AS1
PLe
AS2
SRPC1
SRPC2
AD
Price Level
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AS
GDPR Qf
LRAS Inflation
SRPC
Unemployment UY
LRPC AS2
PLe
SRPC1 AD2
The Laffer
Curve
Shows relationship between tax
rate and tax revenue. What would happen if the highest tax
bracket was 75%?
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THINK ROBIN HOOD!!!!!! What was his group’s name? Merry Men What did they do? Laugh a lot…they were “Laffers.” What was his weapon of choice? Bow and Arrow What did Robin Hood do? Steal from the rich and give to the poor. What would happen to the amount of travelers through Sherwood forest if he took 95% instead of 39% of their money?
What would happen to the total amount of money he collects?
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The Laffer Curve
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% Tax
Rate
Tax Revenue
If the government
increase taxes rates tax
revenue will increase
If the tax rate becomes
too high, tax revenue
will fall since workers
have no incentive to
work harder
n
m
l
The Debate over the Laffer Curve
• Lower taxes give
incentive to “buy more
leisure”
• Lower taxes encourage
immediate spending
increases which may
result in inflation
• Where are we on the
curve? What if we think
n but really at m?
• Lower taxes give
incentives to work
• Lower taxes
encourage eventual
savings and
investments
Supporters Critics
Where is the U.S. currently?
Analyzing the Economy
Graphically
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Use the following models to
show full employment, a
recessionary gap, and an
inflationary gap.
1. PPC
2. Business Cycle
3. AD/AS
4. Phillips Curve
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The Good, the Bad, and the Ugly
Unemployment
Inflation
GDP Growth
Good
6% or less
1%-4%
2.5%-5%
Worry
6.5%-8%
5%-8%
1%-2%
Bad
8.5 % or more
9% or more
.5% or less
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