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Changes in the AD-AS Model and the Phillips curve | APⓇ Macroeconomics | Khan Academy - YouTube
Channel: Khan Academy
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in this video we're going to build on
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what we already know about aggregate
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demand and aggregate supply and the
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phillips curve and we're going to
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connect these ideas so first the
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phillips curve this is a typical
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phillips curve for an economy high
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inflation is associated with low
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unemployment high unemployment is
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associated with low inflation
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but we can really view this curve as the
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short run phillips curve short run
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phillips curve we might sit at different
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points on this curve at different points
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in an economic cycle but we can also
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introduce an idea known as a long-run
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phillips curve which is just based on
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the natural rate of unemployment for
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this economy so let's say the natural
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rate of unemployment for this economy is
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six percent so then our long run
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phillips curve would just be a vertical
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line right over there
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long
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run
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phillips curve now why is it a vertical
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line well it says in the long run our
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natural rate of unemployment is six
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percent regardless of what the inflation
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rate might be
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and so if we are sitting at the
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intersection of these two curves that
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means that our economy right in this
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moment in time is operating at full
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employment if unemployment was lower
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than that it would be overheating to
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some degree and if unemployment were
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higher than that then we would have a
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negative output gap but how do we tie
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these ideas to aggregate demand and
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aggregate supply
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well let's draw our long run aggregate
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supply curve
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and i'm going to do it right at the
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intersection of our aggregate demand and
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short run aggregate supply curve for now
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because i want to show an economy that's
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operating at its full potential
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so here
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this is our long run
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aggregate supply and once again it's a
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vertical line because in the long run
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regardless of the price level we have a
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certain output for this economy that is
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sustainable so that is our full
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employment i'll do f period e period
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that's our full employment output
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anything more than that it's
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unsustainable based on where the economy
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is structurally right now and anything
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less than that is you have a negative
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output gap
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but now let's think about what would
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happen if we start shifting curves
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around what if we were to have a
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negative demand shock so our aggregate
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demand curve shifts to the left
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well in that world and this is all a
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review you can see that your equilibrium
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price so let me call this aggregate
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demand sub two
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our price level two
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and our new
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equilibrium output for our economy sub
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two you can see that both are lower we
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now have a negative output gap but what
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would that correspond to here on our
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phillips curves
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well when you have a negative output gap
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you're likely to have higher
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unemployment and shifts in aggregate in
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the aggregate demand curve would be
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movements along the short run phillips
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curve so we're going to move along the
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short run phillips curve and we're going
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to have higher unemployment because we
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have a negative output gap so we might
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get to that point right over there so
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i'll just call that point sub 2. so we
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went from a situation where before we
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had six percent unemployment and let's
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say we had three percent inflation to a
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world where maybe now
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we have i don't know let's call it nine
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percent unemployment and now we have
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two
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percent inflation and it could go the
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other way around let's say we were
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starting from our original aggregate
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demand curve and you have a positive
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demand shock
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and so now
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we could get to this curve aggregate
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demand three and so here our equilibrium
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price level is higher let's call it p
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sub three and our equilibrium output we
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have a positive output gap so y
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sub three and that would correspond to
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if we have a positive output gap that
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means we have very low unemployment
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maybe unsustainably low unemployment so
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we might be right over here so this
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might be a situation where our
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unemployment rate let's say that's about
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i don't know
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four percent and now our inflation this
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might be let's call that four percent as
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well
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and something interesting happens as you
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start to have higher and higher
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inflation that can lead to people just
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having higher expectations for price and
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higher expectations for inflation itself
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and if folks have higher expectations
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for inflation well then they might want
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to charge more for a certain level of
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output
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so let's say this level of output people
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might want to have a higher price level
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at this level of output people might
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want to have a higher level price a
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higher price level and so it could
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actually shift our short run aggregate
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supply up or you could say to the left
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so short run aggregate supply i'll call
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that sub 3.
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now when the short run aggregate supply
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gets shifted to the left in this
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situation notice we are back to our full
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employment output but our price level is
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now much higher now what would that
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correspond to over here well when you
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have a shift in short run aggregate
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supply curves that would actually lead
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to a shift in your short run phillips
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curve but which way would it shift well
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another way to think about it is at a
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given just as at a given level of output
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you would have expected higher price
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because of this increased inflation
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expectations so here at a given level of
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unemployment you would expect a higher
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level of inflation so our curve you
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could say shifts up or to the right so
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we would then have
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a short run phillips curve
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phillips curve that looks like this i'll
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call that sub 3
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and we might get back to this point well
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for sure if we're at this full
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employment output then we are operating
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our natural rate of unemployment again
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but notice now our inflation has crept
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even higher this might be five percent
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inflation
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now the last thing you might be
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wondering about is when do these long
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run curves ever shift
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well we've talked about it before when
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we talk about long run aggregate supply
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and that shifts if the economy
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structurally changes somehow let's say
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our factories get bombed out in a war or
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something then this should shift to the
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left
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and if i if we got better technology or
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are better ways of organizing ourselves
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or more resources this might shift to
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the right
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similarly if there's a massive shift in
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global trade and maybe our worker skills
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aren't as valuable anymore in the global
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economy and this long run phillips curve
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might shift to the right if all of a
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sudden we are able to or over time we're
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able to get people more skilled maybe we
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get frictional unemployment down because
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we have better technology to place
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people well that might shift this to the
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left
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