Institute of International Education 4 3 The short run trade off between Inflation and Unemployment ▪ How are inflation and unemployment related in the short run? In the long run? ▪ What factors alter[.]
Trang 14.3 The short-run trade-off between
Inflation and Unemployment
▪ How are inflation and unemployment related in the short run? In the long run?
▪ What factors alter this relationship?
▪ What is the short-run cost of reducing inflation?
Trang 2unrelated:
MS, controlled by Fed
the minimum wage, the market power of unions, efficiency wages, and process of job search
Trang 3Unemployment and Inflation
In the short run, society faces a trade-off between inflation and unemployment.
unemployment, but only at the cost of higher inflation
at the cost of temporarily higher unemployment
Trang 4The Phillips Curve
▪ The greater the AD for goods and services, the greater is the economy’s output, and the higher
is the overall price level
▪ A higher level of output results in a lower level
of unemployment
The Phillips curve illustrates the short-run relationship between inflation and unemployment
arise as shifts in the AD curve move
Trang 5Phillips curve
0
(b) The Phillips Curve
Inflation Rate (% per year)
Unemployment
Rate (%)
0
(a) The Model of AD and AS
Price Level
Low AD
High AD
B
4
6
(output is 8,000)
A
7
2
(output is 7,500)
A
7,500
102
(unemployment
is 7%)
B
8,000
106
(unemployment
is 7%)
SRAS
AD, AS & the Phillips Curve
Y
possible outcomes for next year:
Trang 6Shifts in the Phillips Curve
▪ The Phillips curve seems to offer policymakers a
menu of possible inflation and unemployment outcomes
• low unemployment with high inflation
• low inflation with high unemployment
• anything in between
Trang 7The Vertical Long-Run Phillips Curve
temporary
▪ Natural-rate hypothesis: the claim that
unemployment eventually returns to its normal or
“natural” rate, regardless of the inflation rate
at the natural rate of unemployment