Textbook Guide Economics: Phillips Curve, Aggregate Supply, Aggregate Demand
Document Summary
Phillips curve shows the inverse relationship between the rate of inflation and the rate of unemployment in an economy: by altering monetary and fiscal policy to influence aggregate demand, policymakers could choose any point on this curve. Aggregate demand, aggregate supply, and the phillips curve. If aggregate demand is low, output is low, and the price level is low: (b) shows the implication for the phillips curve. Point a, which arises when aggregate demand is low, has high unemployment and low inflation. Shift in the phillips curve: the role of expectations. The long-run equilibrium moves from point a to point b. The rate of unemployment is the same at these two points. Unemployment rate = natural rate of unemployment a( actually inflation- expected inflation: when expected inflation is given, the economy goes from point a to point b. The economy ends up at point c, with higher inflation but with the same level of unemployment.