Chapter_35 - Chapter 35Chapter 35 The Short-Run Tradeoff...

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Unformatted text preview: Chapter 35Chapter 35 The Short-Run Tradeoff Between Inflation and Unemployment WHATS NEW IN THE THIRD EDITION: There is a new In the News box on "The Case for Inflation Targeting." LEARNING OBJECTIVES: By the end of this chapter, students should understand: why policymakers face a short-run tradeoff between inflation and unemployment. why the inflation-unemployment tradeoff disappears in the long run. how supply shocks can shift the inflation-unemployment tradeoff. the short-run cost of reducing inflation. how policymakers credibility might affect the cost of reducing inflation. CONTEXT AND PURPOSE: Chapter 22 is the final chapter in a three-chapter sequence on the economys short-run fluctuations around its long-term trend. Chapter 20 introduced aggregate supply and aggregate demand. Chapter 21 developed how monetary and fiscal policy affect aggregate demand. Both Chapters 20 and 21 addressed the relationship between the price level and output. Chapter 22 will concentrate on a similar relationship between inflation and unemployment. The purpose of Chapter 22 is to trace the history of economists thinking about the relationship between inflation and unemployment. Students will see why there is a temporary tradeoff between inflation and unemployment, and why there is no permanent tradeoff. This result is an extension of the results produced by the model of aggregate supply and aggregate demand where a change in the price level induced by a change in aggregate demand temporarily alters output but has no permanent impact on output. 1 2 Chapter 35/The Short-Run Tradeoff Between Inflation and Unemployment Chapter 35/The Short-Run Tradeoff Between Inflation and Unemployment 3 KEY POINTS: 1. The Phillips curve describes a negative relationship between inflation and unemployment. By expanding aggregate demand, policymakers can choose a point on the Phillips curve with higher inflation and lower unemployment. By contracting aggregate demand, policymakers can choose a point on the Phillips curve with lower inflation and higher unemployment. 2. The tradeoff between inflation and unemployment described by the Phillips curve holds only in the short run. In the long run, expected inflation adjusts to changes in actual inflation, and the short-run Phillips curve shifts. As a result, the long-run Phillips curve is vertical at the natural rate of unemployment....
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This note was uploaded on 03/07/2010 for the course FMT 0438310384 taught by Professor Hung during the Spring '10 term at Aarhus Universitet, Aarhus.

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Chapter_35 - Chapter 35Chapter 35 The Short-Run Tradeoff...

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