The Relationship Between Inflation and Unemployment •An inverse relationship between inflation and unemployment until the 1970s •1970s high inflation and unemployment •Is there still a relationship between inflation and unemployment? The Phillips Curve
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The Relationship Between Inflation and Unemployment An inverse relationship between inflation and unemployment until the 1970s 1970s high inflation and.
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The Relationship Between Inflation and Unemployment•An inverse relationship between inflation and unemployment until the 1970s•1970s high inflation and unemployment•Is there still a relationship between inflation and unemployment?
The Relationship Between Inflation and Unemployment•An inverse relationship between inflation and unemployment until the 1970s•1970s high inflation and unemployment•Is there still a relationship between inflation and unemployment?
The Phillips Curve
The 1960s: A Policy Menu?
Explaining the Phillips Curve with Aggregate Demand
and Aggregate Supply Curves
Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate.
As long as SRAS is stable, get Phillips Curve relation
1970s: Why did the Phillips curve vanish?higher oil prices … shift SRAS + inflation expectations…shift SRAS inflation became persistent and positive
1970s: Why did the Phillips curve vanish?higher oil prices … shift SRAS + inflation expectations…shift SRAS inflation became persistent and positive
Explaining the Phillips Curve with Aggregate Demand
and Aggregate Supply Curves
Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate.
As long as SRAS is stable, get Phillips Curve relationIf people expect high inflation… Phillips curve shifts…
Is the Phillips Curve a Policy Menu?
Is the Short-Run Phillips Curve Stable?
During the 1960s, the basic Phillips curve relationship seemed to hold because a stable trade-off appeared to exist between unemployment and inflation.
Then in 1968, in his presidential address to the American Economic Association, Milton Friedman of the University of Chicago argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation.
The Long-Run Phillips Curve
Natural rate of unemployment The unemployment rate that exists when the economy is at potential GDP.
The Long-Run Phillips Curve
A Vertical Long-Run Aggregate Supply Curve Means a Vertical Long-Run Phillips Curve
Natural rate of unemployment The unemployment rate that exists when the economy is at potential GDP.
The Role of Expectations of Future Inflation
The Basis for the Short-Run Phillips Curve
IF… THEN… AND…
actual inflation is greater than expected inflation,
the actual real wage is less than the expected real wage,
labor is cheap …
the unemployment rate falls.
actual inflation is
less than expected inflation,
the actual real wage is greater than the expected real wage,
labor is dear …
the unemployment rate rises.
The Short-Run and Long-Run Phillips Curves
The Short-Run and Long-Run Phillips CurvesThe Inflation Rate and the Natural Rate of Unemployment in the Long Run
Nonaccelerating inflation rate of unemployment (NAIRU) The unemployment rate at which the inflation rate has no tendency to increase or decrease.
Does the Natural Rate of Unemployment Ever Change?
Frictional or structural unemployment can change—thereby changing the natural rate—for several reasons: