{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

KW_Macro_Ch_15_Sec_04_Unemployment_and_Inflation_Phillips_Curve

KW_Macro_Ch_15_Sec_04_Unemployment_and_Inflation_Phillips_Curve

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
>> Labor Markets, Unemployment, and Inflation Section 4: Unemployment and Inflation: The Phillips Curve chapter 15 Earlier in this chapter we saw that in 1978, when the Humphrey–Hawkins bill set a target unemployment rate of 4%, many economists were concerned: they feared an attempt to achieve that target would lead to high and accelerating inflation. What was the basis for these concerns? We’ve seen part of the answer: 4% was well below estimates of the natural rate of unemployment. But what’s wrong with trying to keep unemployment below the nat- ural rate? To answer that question we need to look at the relationship between unem- ployment and inflation. The Short-Run Phillips Curve In a famous 1958 paper the New Zealand–born economist A. W. H. Phillips found that historical data for the United Kingdom showed that when the unemployment
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 C H A P T E R 1 5 S E C T I O N 4 : U N E M P L OY M E N T A N D I N F L AT I O N : T H E P H I L L I P S C U R V E rate is high, the wage rate tends to fall, and when the unemployment rate is low, the wage rate tends to rise. Using data from Britain, the United States, and elsewhere, other economists soon found similar patterns between the unemployment rate and the rate of inflation—that is, the rate of change in the overall price level. The negative short-run relationship between the unemployment rate and the inflation rate is called the short-run Phillips curve, or SRPC. (We’ll explain the difference between the short run and the long run in a little while.) Figure 15-5 shows a hypothetical short-run Phillips curve. Why is there a negative short-run relationship between the unemployment rate and the inflation rate? Recall the short-run aggregate supply curve from earlier chapters. The SRAS curve shows that when a rightward shift of the aggregate demand curve leads to an increase in the aggregate price level, real GDP increases as well. In other words, there is a positive relationship between the aggregate price level and real GDP. But how does this relate to unemployment? Remember that there is a negative rela- tionship between real GDP and the unemployment rate: Okun’s law tells us that when real GDP is higher than potential output, the unemployment rate will be lower than when real GDP is below potential output. So increases in the aggregate price level are associated with increases in real GDP, which in turn tend to lead to lower unemployment rates. The relationship between the short-run Phillips curve and the short-run aggregate supply curve is a bit trickier than presented here. Specifically, this discussion describes a relationship between changes in the unemployment rate and inflation; the short-run Phillips curve, however, describes a relationship between the level of the unemploy- ment rate and inflation.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern