Chapter 33 - Inflation and the Phillips CurveChapter Thirty ThreeInflation and the Phillips CurveLearning ObjectivesAfter you teach the material in this chapter, your students should be able to do thefollowing:1.State some of the distributional effects of inflation.2.Explain how inflation expectations are formed.3.Outline the quantity theory of money and its theory of inflation.4.Outline the institutionalist theory of inflation. 5.Differentiate between long-run and short-run Phillips curves.6.Explain the different views on the relationship between inflation and growth. Teaching ObjectivesTo help your students achieve the Learning Objectives above, you should anticipatecommon student difficulties with the material and be prepared to do the following:Stress a proper understanding of the role of inflation in the economy. Yourstudents may remember seeing countless media reports during the first half of2008 about rising prices and may assume that, since they never saw media reportsto the contrary, prices are still rising quickly. Students also often believe thatrising prices always hurt consumers—that suppliers raise prices and keep priceincreases as profits. Half of the battle of teaching inflation is disavowing studentsof these false impressions. (LO1, LO6)Take your time with the equation of exchange and the quantity theory. Thoughthis material is not terribly difficult, it is the first time your students will havedone this kind of analysis in this course, analyzing the components of an equationand how they relate. The “bar” over Vand Qmight also be new to them. Be sureto point out that if Qis going up at a particular rate, then a same-sized increase inMis necessary to prevent price-level changes. If Qgoes up, but Mdoes not, priceswill have to fall. (LO3)33-1
Chapter 33 - Inflation and the Phillips CurveConnect the short-run Phillips curve to the SAScurve. Not only is this sound, butit’s also quite helpful. First of all, the text does this well, especially in Figure 16-5. Secondly, students have been working with the AS/ADmodel for severalchapters now and ought to be pretty comfortable with it. If you’d like, you canpoint out how the short-run Phillips curve appears to be almosta mirror image ofthe SAScurve. Both models, when graphed, have information relating to the pricelevel on the vertical axis. The AS/ADmodel has output on the horizontal axis,while the Phillips curve diagram has unemployment. Remind your students aboutthe negative relationship between output and unemployment: when output is high,unemployment is low, and vice versa. (LO5)Changes to the 8thEditionThe following summarizes the ways in which this chapter has been updated since the 7thedition. Professors used to teaching from the previous edition will want to review thissection to be sure they are up-to-date.