Chapter 36 Unemployment and Inflation
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Chapter 36
Unemployment and Inflation
Economic Cycle
Saudi Inflation Rate
Saudi Unemployment Rate
A. W. Phillips(1914 - 1975)
Phillips Curve
Relationshipbetween
Inflation andUnemployment
Phillips Curve
A curve that shows the short-run trade-off
between unemployment and inflation
InflationRate
Unemployment Rate4% 7%
6%
2%
Phillips Curve
TradeoffHigh Inflation and Low UnemploymentLow Inflation and High Unemployment
Milton Friedman(1912 - 2006)
No Long RunStructural
Relationshipbetween
Inflation andUnemployment
PriceLevel
Quantity of Output
P1
AD- AS Model
Aggregate Demand
Short RunAggregateSupply
Y1 Y2
P2
Long RunAggregateSupply
P3
Short-Run
Long-Run
Inflation can reduce unemployment
Inflation and unemployment are unrelated
InflationRate
Unemployment Rate
Phillips Curve
Short-Run
Long-Run
No relationshipbecause LRAS is vertical
Natural Rate Hypothesis
The claim that unemployment returns to its normal, or natural rate regardless of the rate of
inflation
Disinflationreduction in the rate of inflation - slows down
Deflationreduction in the price level
go in reverse
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