The Phillips Curve in ACTION
{"Image DocumentName": "The Phillips Curve in ACTION", "Image ImageDescription": "Let\u2019s start at point A, a point of price stability (\uf050=0%) and full employment (u=un). Remember, each short-run Phillips curve is defined by the presence of fixed expectations. Suppose there is an increase in the rate of growth of the money supply causing LM and AD to shift out resulting in an unexpected increase in inflation. The Phillips curve equation \uf050 = \uf050e \u2013 b(u-un) + v implies that the change in inflation misperceptions causes unemployment to decline. So, the economy moves to a point above full employment at point B. As long as this inflation misperception exists, the economy will. remain below its natural rate un at u . un. \uf050 Unemployment, u. LRPC (u=un) 5% 10% SRPC (\uf050e=0%) SRPC (\uf050e=10%) SRPC (\uf050e=5%) When the economic agents realize the new level of inflation, they will end up on a new short-run Phillips curve where expected inflation equals the new rate of inflation (5%) at point C, where actual inflation (5%) equals expected inflation (5%). D. E. If the monetary authorities opt to obtain a lower u again, then they will increase the money supply such that \uf050 is 10%, for example. The economy moves to point D, where actual inflation is 10% but, \uf050e is 5%. B. C. u When expectations adjust, the economy will land on a new SRPC, at point E, where both \uf050 and \uf050e equal 10%. A.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}