Ch16 - 11/10/2009 Inflation, Unemployment, and Federal...

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11/10/2009 1 Inflation, Unemployment, and Federal Reserve Policy 1 Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate. Learning Objective 16.1 FIGURE 16.1 The Phillips Curve 2
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11/10/2009 2 Learning Objective 16.1 Explaining the Phillips Curve with Aggregate Demand and Aggregate Supply Curves FIGURE 16.2 Using Aggregate Demand and Aggregate Supply to Explain the Phillips Curve 3 Structural relationship A relationship that depends on the basic behavior of Learning Objective 16.1 Is the Phillips Curve a Policy Menu? that depends on the basic behavior of consumers and firms and remains unchanged over long periods. Is the Short-Run Phillips Curve Stable? During the 1960s, the basic Phillips curve relationship seemed to hold because a stable trade-off appeared to exist between unemployment and inflation unemployment and inflation. Then in 1968, in his presidential address to the American Economic Association, Milton Friedman of the University of Chicago argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation. 4
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11/10/2009 3 Natural rate of unemployment Learning Objective 16.1 The Long-Run Phillips Curve The unemployment rate that exists when the economy is at potential GDP. 5 Learning Objective 16.1 The Long-Run Phillips Curve FIGURE 16.3 A Vertical Long-Run Aggregate Supply Curve Means a Vertical Long Run Phillips Curve Means a Vertical Long-Run Phillips Curve 6
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11/10/2009 4 Learning Objective 16.1 The Role of Expectations of Future Inflation 30 $ 100 50 . 31 $ 100 wage Nominal wage Real = × = × = 105 level Price NOMINAL WAGE EXPECTED REAL WAGE ACTUAL REAL WAGE Expected P 2012 = 105 Actual P 2012 = 102 Actual P 2012 = 108 Table 16-1 The Impact of Unexpected Price Level Changes on the Real Wage Expected Inflation = 5% Actual Inflation = 2% Actual Inflation = 8% $31.50 $31.50 100 $30 105 ×= $31.50 100 $30.88 102 $31.50 100 $29.17 108 7 Learning Objective 16.1 The Role of Expectations of Future Inflation Table 16-2 The Basis for the Short- Run Phillips Curve IF… THEN… AND… actual inflation is greater than expected inflation, the actual real wage is less than the expected real wage, the unemployment rate falls.
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This note was uploaded on 02/22/2010 for the course FBE ECON1002 taught by Professor Rao during the Spring '10 term at HKU.

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Ch16 - 11/10/2009 Inflation, Unemployment, and Federal...

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