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Phillips Curve and Expected Inflation definitions

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  • Phillips Curve
    Graphical representation showing the relationship between inflation and unemployment, with distinct short-run and long-run interpretations.
  • Short Run Phillips Curve
    Curve illustrating an inverse relationship between inflation and unemployment, valid when actual inflation differs from expected inflation.
  • Long Run Phillips Curve
    Vertical curve indicating no trade-off between inflation and unemployment, always aligning with the natural rate of unemployment.
  • Natural Rate of Unemployment
    Level of unemployment where the economy returns regardless of inflation, as predicted by the long run Phillips curve.
  • Expected Inflation
    Anticipated rate of price increase, influencing wage agreements and labor demand, and shifting the short run Phillips curve.
  • Actual Inflation
    Observed rate of price increase, which, when different from expectations, temporarily alters unemployment levels.
  • Nominal Wage
    Stated wage amount before adjusting for inflation, used by businesses to set pay for workers.
  • Real Wage
    Purchasing power of wages after accounting for inflation, affecting labor costs and hiring decisions.
  • Trade-off
    Short-run inverse relationship between inflation and unemployment, absent in the long run according to economic theory.
  • Equilibrium
    State where actual inflation matches expected inflation, causing both Phillips curves to intersect and unemployment to stabilize.
  • Labor Demand
    Employer desire for workers, influenced by perceived real wage changes due to differences in inflation rates.
  • Purchasing Power
    Ability of wages to buy goods and services, diminished when inflation exceeds expectations.
  • Curve Shift
    Movement of the short run Phillips curve to intersect the long run curve at a new expected inflation rate.
  • Macroeconomic Expectations
    Beliefs about future inflation, crucial for understanding short-run deviations and long-run outcomes in unemployment.
  • Input Prices
    Costs businesses incur for resources, rising with inflation and affecting the relative attractiveness of labor.