lecture15 - 1 15-1 Unemployment and Inflation, Part 1 15-2...

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Unformatted text preview: 1 15-1 Unemployment and Inflation, Part 1 15-2 Agenda Unemployment and Inflation: Is There a Trade-Off? 15-3 Unemployment and Inflation Is there a trade-off between inflation and unemployment? In 1958, A.W. Phillips found a negative relationship between unemployment and nominal wage growth in Britain. The inverse relationship between inflation and the unemployment rate is called the Phillips Curve . = -f(u) 15-4 Unemployment and Inflation The Phillips Curve: In the 1950s and 1960s many nations seemed to have a negative relationship between inflation and the unemployment rate. The United States appeared to be on a Phillips curve in the 1960s. 2 15-5 The U.S. Phillips curve in the 1960s 15-6 Unemployment and Inflation The Phillips Curve: Both the position and slope of the Phillips curve are important: The position identifies the attainable goals. Slope identifies the trade-offs: A steep curve implies a big change in inflation for a small change in unemployment. A flat curve implies a small change in inflation for a big change in unemployment. 15-7 Unemployment and Inflation The Phillips Curve: The Phillips curve suggests that policymakers can choose the combination of unemployment and inflation they most desired. 15-8 Unemployment and Inflation The Phillips curve: In the late 1960s, Milton Friedman and Edmund Phelps argued that the cyclical unemployment rate depends only on unanticipated inflation. The cyclical unemployment rate is the difference between the actual and natural unemployment rates, i.e., u u . Unanticipated inflation is the difference between the actual and expected inflation rates, i.e., - e . 3 15-9 Unemployment and Inflation The expectations-augmented Phillips curve: The inverse relationship between the cyclical unemployment rate and unanticipated inflation hypothesized by Friedman and Phelps is called the expectations-augmented Phillips curve. - e = f ( u u ) or = e f ( u u ) When u = u , then = e ....
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This note was uploaded on 04/01/2008 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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lecture15 - 1 15-1 Unemployment and Inflation, Part 1 15-2...

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