•because the long run Phillips curve exists at the natural rate of unemployment, structural changes in the economy that affect unemployment will also cause the LRPC to shift.
•increases in unemployment will shift LRPC>
•decreases in unemployment will shift LRPC<
•Changes in the AS/AD model can also be seen in the Phillips curves
•an easy way to understand how changes in the AS/AD model affect the Phillips curve is to think of the two sets of graphs as mirror images
•NOTE: the 2 models are not equivalent. The AS/AD model is static, but the Phillips curve includes change over time. Whereas AS/AD shows one time changes in the price level as inflation or deflation, the Phillips curve illustrates continuous change in the price level as either increased inflation or disinflation.
Periods of Stagflation:
•civil rights movement
•women's movement
•baby boom error
•Vietnam ended
• all embargo (1973 and 1979)
•Disinflation: reduction in the inflation rate from year to year.
•This also occurs when aggregate demand declines.
•In the short run, profits fall and the unemployment rate increases.
•Deflation: an actual drop in the price level.
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