# The phillips curve 1 if u t u n then ie inflation

• Notes
• 50
• 100% (1) 1 out of 1 people found this document helpful

This preview shows page 24 - 40 out of 50 pages.

)
15-25The Phillips CurveThe modern Phillips curve is the basis for deriving the aggregate supply curve.Because there are both long-run and short-run Phillips curves, there are both long-run and short-run aggregate supply curves.
15-26The Long-Run Aggregate Supply Curve
15-27The Long-Run Aggregate Supply CurveThe long-run aggregate supply curve, LRAS,is the verticalrelationshipbetween:1.Inflation,π, and2.Potential output, YP.
15-28The Long-Run Aggregate Supply CurveThe long-run aggregate supply curve, LRAS,is derived from the long-run Phillips curve by replacing:1.The natural rate of unemployment, UN, with2.Potential output, YP.Potential output, YP,is the output that is produced at the natural rate of unemployment.
15-29The Long-Run Aggregate Supply CurveYπ
The Long-Run Aggregate Supply CurveThe LRAS curve is verticalat potential output because a rise in inflation causes:
The Long-Run Aggregate Supply CurveThe LRAS curve will shiftif there is :
15-32The Long-Run Aggregate Supply CurveYπLRAS0YP
15-33The Short-Run Aggregate Supply Curve
15-34The Short-Run Aggregate Supply CurveThe short-run aggregate supply curve, SRAS,is the positiverelationship between:1.Inflation,π, and2.The actual output that firms are producing,Y.
15-35The Short-Run Aggregate Supply CurveThe short-run aggregate supply curve, SRAS,is derived from the short-run Phillips curve by replacing:1.The unemployment gap, U – UN,with2.The output gap, Y – YPusing Okun’s law.
15-36The Short-Run Aggregate Supply CurveOkun’s lawdescribes the relationship between the unemployment gap and the output gap as:U – UN= – β( Y – YP)
15-37Okun’s LawThe Short-Run Aggregate Supply CurveYPYUUN
15-38The Short-Run Aggregate Supply CurveStart with the modern Phillips curve:and Okun’s law:U – UN= – β( Y – YP)Substitute and generalize:πt= πt-1ω( Ut– UN) + ρtπt= πt-1+ γ( Yt– YP) + ρt
15-39The Short-Run Aggregate Supply CurveYπLRAS0YP