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Phillips Curve and Expected Inflation definitions

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  • Phillips Curve
    A graphical representation showing the relationship between inflation and unemployment, with distinct short run and long run interpretations.
  • Short Run Phillips Curve
    A curve illustrating an inverse relationship between inflation and unemployment, influenced by differences between actual and expected inflation.
  • Long Run Phillips Curve
    A vertical line on a graph indicating that, over time, inflation does not affect the natural rate of unemployment.
  • Expected Inflation
    The rate of price increase that consumers and firms anticipate, shaping wage agreements and economic decisions.
  • Actual Inflation
    The observed rate at which prices rise in the economy, which may differ from what was previously anticipated.
  • Nominal Wage
    The dollar amount paid to workers, not adjusted for changes in the price level or purchasing power.
  • Real Wage
    The purchasing power of income earned by workers, reflecting how much goods and services can be bought.
  • Natural Rate of Unemployment
    The baseline level of joblessness in an economy, unaffected by the inflation rate in the long run.
  • Rational Expectations Theory
    An economic idea stating that individuals use all available information to forecast future economic variables.
  • Trade Off
    A situation where achieving lower unemployment comes at the cost of higher inflation, or vice versa, in the short run.
  • Equilibrium
    A point where actual inflation matches expected inflation, causing short run and long run Phillips curves to intersect.
  • Purchasing Power
    The amount of goods and services that can be bought with a given amount of income, affected by inflation.
  • Curve Shift
    A movement of the entire Phillips curve, typically caused by changes in expected inflation.
  • Profit
    The financial gain firms experience when costs, such as real wages, decrease relative to product prices.
  • Labor
    The workforce available to firms, whose cost is perceived differently depending on the relationship between actual and expected inflation.