the phillips curve

• What happens when an economy is producing near full employment and there is an increase in aggregate demand (AD)?


  Firms will try to hire more workers to meet the increase in AD.
• What is the effect of increased hiring on wages when labor is in short supply?


  Wages will increase as firms need to attract workers.
• What does the original Phillips Curve compare?


  It compares the unemployment rate to changes in wages.
• What does low unemployment correlate with according to the Phillips Curve?


  Higher rates of wage growth
• What do the dots on the Phillips Curve represent?


  UK data from years between 1851 and 1967
• How has the Phillips Curve been modified in recent times?


  It now shows the relationship between inflation and unemployment.

  
• What is one of the primary determinants of increases in the price level?


  Wage growth
• What are the two iterations of the Phillips Curve?


  Short run and long run
• How does the Short Run Phillips Curve (SRPC) relate to the Short Run Aggregate Supply (SRAS) curve?


  The SRPC is effectively a mirror image of the SRAS curve.
• What happens to employment when output increases?


  Employment increases or unemployment decreases.
• What occurs when the nation's AD moves from AD0 to AD1?


  • Unemployment moves from 6% to 4.5%
  • Indicates a lower rate of unemployment
• What happens to inflation as unemployment continues to fall from point C to point A on the SRPC?


  • Inflation decreases from 4% to 1%
  • Reflects the inverse relationship between unemployment and inflation
• What does the Phillips Curve imply about the relationship between unemployment and inflation?


  There is a trade-off; if one increases, the other should decrease.

  
• What economic phenomenon occurred during the 1970s that challenged the Phillips Curve?


  Stagflation
• What does stagflation represent in terms of unemployment and inflation?


  An increase in both unemployment and inflation.
• What causes the SRPC to shift to the right?


  An increase in prices of factors of production leading to higher unemployment.
• What happens in the Long Run Phillips Curve when AD increases?


  • Unemployment falls below the natural rate of unemployment (NRU)
  • Inflation increases more rapidly as labor markets tighten
• What happens to wage negotiations in the long run?

  Workers start to price their expectations of inflation into wage negotiations.
• What are the two effects of increased wage rates on firms?

  Firms will stop employing extra workers and raise prices to cover higher wages.
• What occurs at point A in the Long Run Phillips Curve?


  • Equilibrium level of output at full employment
  • Natural rate of unemployment (NRU) is 4.5%
• What happens at point B in the Long Run Phillips Curve?


  • Increase in AD pushes the economy beyond full employment
  • Unemployment rate falls and inflation rate rises
• What occurs at point C in the Long Run Phillips Curve?


  • Economy adjusts back to NRU at a higher wage rate
  • Unemployment reverts back to the original 4.5%
• What is the implication of the Long Run Phillips Curve being vertical?


  An economy will revert to the natural rate of unemployment regardless of the inflation rate.
• What is the significance of the article linked at the end of the study material?

  • Discusses the Reserve Bank of Australia's impact on the economy
  • Raises questions about potential recession