Represents the relationship between unemployment and inflation. The trade of between inflation and unemployment only occurs in the short run.
Two points
- Short run- inverse relationship between inflation and unemployment. When inflation increase unemployment goes down. Relevance to Okun's law. Since wages are sticky inflation changes move the points on the SRPC. If inflation persists and expected rate of inflation rise then the entire SRPC moves upwars causing inflation. If inflation expectation drop due to technology or economic growth then the SRPC will move downward.
AS shocks (rapid increase in resource cost) can cause higher rates of unemployment.
- Long run- occurs at the natural rate of unemployment. (4-5 percent) If the natural rate of unemployment the vertical line changes. Represented by vertical line. No trade off between unemployment and inflation in the long run. Meaning economy produces at full employment level. LRPC will only shift if the LRAS curve shifts.
Misery index is the combination of unemployment and inflation in any given year. Single digit memory is good. (4-5 percent)
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