Phillips curve graph?

im making phillips curve graph with overall CPI. Where does the CPI go on the graph, because i thought only infaltion and unemployment rates are on the graph.

Phillips curve graph?heart rate monitor

You are right; the philips curve showsthe relationship between inflation rate and unemployment rate.

If you want to put CPI instead then you%26#039;ll end up with aggregate demand and aggregate supply curves, but the relationship can still be shown.

Now if there is a Non Accelerating Inflation Rate of Unemployment (NAIRU) where basically every one has a job, this puts a maximum to supply and becomes or is your long run supply curve, a vertical line. This means that this is the max the economy can sustain, and anything past that causes inflation.

The traditional philips trade-off is still there in the shape of short run supply curves, but the key is that these are drawn for given price expectations.

Let%26#039;s say we start at equilibrium at NAIRU. Let the government unexpectedly increase expenditure. The Demand curve shifts right/up. Now, given that this is unexpected, we move along the short run supply curve, as output rises, so does price, but output rises faster. This is the traditional philips: inflation going up as unemployment rate falls.

However, when workers realsie that the increase in demand is causing an increase in prices, and real wages are adjusted to reflect that, the short run supply curve shifts up (you need higher nominal wages to compensate for price increases, hence costs go up further so does the cpi/price level).

Eventually, you%26#039;ll end up back at NAIRU with a higher price level than before, and on a higher short run supply curve given expectations of higher prices.

This is a ne0-classical rational expectations type of argument, but the real difference between teh schools is how long does it take for the expectations to adjust and thus ho wlong there is a philips type trade off. Keynesian-type will say it takes a while, classical-types would say immediately.

In any case, you can use CPI and Output to illustrate the philips trade off, although, rather than using the philips curve per se, you use aggregate supply (SR and LR) and aggregate demand instead. The SR Aggregate Supply curve illustrates traditional philips trade-off.

Hope that helped.