Lecture 18 - Economics 102 Lecture 18: The Phillips Curve...

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1 Economics 102 Lecture 18 : The Phillips Curve LECTURE 18 THE PHILLIPS CURVE 1 The Phillips Curve § During the 1960s, the consensus among economists was that there was an exploitable trade-off between the rate of inflation and unemployment rate. If we wanted to reduce unemployment permanently, we only had to accept a little more inflation. § During the 1970s, the economy experienced increases in both inflation and unemployment (stagflation). What happened to the trade-off? LECTURE 18 THE PHILLIPS CURVE 2 In this lecture, look for the answers to these questions: § How are inflation and unemployment related in the short run? In the long run? § What factors alter this relationship?
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2 LECTURE 18 THE PHILLIPS CURVE 3 Introduction § In the long run, inflation and unemployment are unrelated: The inflation rate depends mainly on growth in the money supply. Unemployment (the “natural rate”) depends on the minimum wage, the market power of unions, efficiency wages, and the process of job search. § In the short run, society faces a trade-off between inflation and unemployment. LECTURE 18 THE PHILLIPS CURVE 4 The Phillips Curve § 1958: A.W. Phillips showed that nominal wage growth was negatively correlated with unemployment in the U.K. § 1960: Paul Samuelson and Robert Solow found a negative correlation between U.S. inflation & unemployment, named it “the Phillips Curve.” § The Phillips Curve was seen as providing a stable (structural) “policy menu.” LECTURE 18 THE PHILLIPS CURVE 5 Inflation and Unemployment: The Phillips Curve § Phillips curve : shows the relationship between § There are two time frames for Phillips curves: The The
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3 LECTURE 18 THE PHILLIPS CURVE 6 Short-Run Phillips Curve § This figure illustrates the short-run Phillips curve ( PC ) – a downward- sloping curve. § If the unemployment rate falls, § And if the unemployment rate rises, PC 6% 5% A U-rate inflation B C LECTURE 18 THE PHILLIPS CURVE 7 Deriving the Short-Run Phillips Curve § The negative relationship between the inflation rate and the unemployment rate can be explained by the AS-AD model.
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Lecture 18 - Economics 102 Lecture 18: The Phillips Curve...

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