Long run Philips curve

• What should you watch to fully understand the long-run Phillips curve?

  The previous video on the short-run Phillips curve
• According to monetarists, what happens to output in the long run?

  Output returns to the full employment level
• Which model is used to derive the long-run Phillips curve?

  The classical AD/AS model
• In the classical model, what is the immediate effect of an increase in aggregate demand (AD) on output?

  Output increases from YF to Y2
• In the short term, what are the two effects of increased AD in the classical model?

  Increased output and demand-pull inflation
• On the Phillips curve, what two things happen in the short term as output increases?

  Inflation increases and unemployment decreases
• What does the movement up the Philips curve represent?

  An increase in inflation and a reduction in unemployment
• Starting at 2% inflation and 5% unemployment, what happens when AD increases?

  Inflation rises to 3%, unemployment falls to 3%
• What is the limitation of the short-run Phillips curve?

  It doesn't explain the economy's self-adjustment
• In the classical model, how does the economy self-adjust in the long run?

  Workers revise wage expectations upwards
• What is the effect of workers demanding higher wages?

  SRAS shifts left, causing cost-push inflation
• On the Phillips curve diagram, which way does the short-run Phillips curve shift when workers revise wage expectations upward?

  To the right
• If the SRPC shifts right after an AD increase, what happens to inflation and unemployment in the long run?

  Inflation increases, unemployment returns to natural rate
• What does the long-run Phillips curve show?

  Output at the natural rate of unemployment
• What does the long-run Phillips curve tell us about the economy's return?

  The economy will always return to the natural rate
• What does NAIRU stand for?

  Non-accelerating inflation rate of unemployment
• What does the NAIRU represent?

  Unemployment rate at which inflation is stable
• If the economy is at the natural rate of unemployment, what happens to inflation?

  The inflation rate is stable
• What is required for the inflation rate to change at the natural rate of unemployment?

  Demand-side management or a supply-side shock
• What happens if there is a demand-side shock and a new equilibrium is formed?

  A new stable inflation rate is established
• According to classical economists, what is needed to reduce unemployment in the long term?

  Supply-side policies
• What conclusion can be drawn from the long-run Phillips curve and long-run aggregate supply?

  Increasing AD doesn't increase long-term growth
• How do supply-side policies affect the long-run Phillips curve?

  Shift it to the left
• What is the only way to sustainably reduce the natural rate of unemployment and achieve macroeconomic objectives?

  Using supply-side policies
• What does the Phillips curve complement?

  Classical ideas and models
• When does the conflict between inflation and unemployment occur?

  In the short run with AD shifts
• What is needed to see long-term growth and reduced unemployment and inflation?

  Supply-side policies
• What happens on the Phillips curve with a decrease in AD in the classical model?

  • Movement from A to C
  • Initially down the short-run Phillips curve.
  • Then the curve shifts to the left as wages revise downwards
  • Still reaches a vertical long-run Phillips curve.
• Summarize the key differences between the short-run and long-run Phillips curves.

  • Short-run: Shows a trade-off between inflation and unemployment; shifts due to changes in expectations.
  • Long-run: Vertical at the natural rate of unemployment; indicates no long-term trade-off between inflation and unemployment.
• What is the effect of using supply side policies on growth, unemployment and inflation?

  • Increase in growth
  • Reduction in unemployment
  • Reduction in the inflation rate