Note202_07 - Macroeconomics Theory and Policy Medium Run...

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Macroeconomics Theory and Policy Masoud Anjomshoa 18 35 Medium Run Equilibrium: Short Run: Technological progress: μ↓ Î Î Î Î Î Î Î Î Î Î Î Î Medium Run: Expected price, P e , is adjusted downward Î Î Î Î Î Î Î Î Î Î Î Î ( ) μ + = = + 1 W P : PS ) z , u F( P W : WS : AS e = + + T , G , P M Y Y : AD 36 | | | | | | | | | | | | | | | | | | | | | | | | | Unemployment Rate (%), u Inflation Rate (%), π | Phillips Curve : Phillips (1958): UK 1861-1951 data showed negative relation between unemployment rate, u, and inflation rate, π . So, it seems, there is a trade off between inflation and unemployment rates. Samuelson & Solow (1960): The same type of relation was confirmed for the US data. Friedman & Phelps (1968): These two economists opposed this idea. They believed the unemployment rate, is a function of labor and goods markets structures, and independent from the inflation rate, which is a function of money supply. There should not be any trade off between these two. But the evidence (Phillips Curve) was showing otherwise.
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