Chapter 22

Chapter 22 - Expectations also do too • Suppose we’re...

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Philips’ Curve. Short Run vs. Long Run. o 1958: An economist named Philips wrote an article on the negative relationship he observed between inflation and the unemployment rate. The relationship that he looked at was a short run relationship. o They noticed that you could use monetary or fiscal policy to increase aggregate demand in the short run. Inflation will be higher and the natural growth rate of output will increase. Unemployment rate will decrease. o In the long run, this doesn’t occur though. There is no trade off in the long run. The Philips Curve is downwards sloping. o This is caused by sticky wages, prices, and misconceptions.
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Unformatted text preview: Expectations also do too. • Suppose we’re in the 1970’s with the OPEC situation and the price of oil goes up. o We are looking at a later period in the 1970’s. • In stagflation, policy makers have a difficult decision to make because they can either: o Do nothing. o Stimulate aggregate demand to reduce the unemployment rate in the short run and increase output at the cost of higher inflation. o Decrease aggregate demand to reduce inflation at the cost of output and the unemployment rate going up more....
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