12 - Chapter 12 Unemployment and Inflation  Learning...

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Unformatted text preview: Chapter 12 Unemployment and Inflation  Learning Objectives I. Goals of Part 4 A) How macroeconomic policy works and how it can best be used 1. Unemployment and inflation (this chapter) 2. Policy in an open economy—international trade and finance (Ch. 13) 3. Monetary institutions and policy (Ch. 14) 4. Fiscal institutions and policy (Ch. 15) II. Goals of Chapter 12 A) Why study unemployment and inflation together? 1. The most important macroeconomic problems 2. Phillips curve relationship B) Study relationship between inflation and unemployment 1. Has it changed over time? 2. Is there a trade-off between inflation and unemployment? C) Study the costs of inflation and unemployment; consider the implications for macroeconomic policy making III. Notes to Fourth Edition Users A) Section 12.2 discusses the possibility that increased labor productivity temporarily reduces the natural rate of unemployment  Teaching Notes I. Unemployment and Inflation: Is There a Trade-off? (Sec. 12.1) A) Many people think there is a trade-off between inflation and unemployment 1. The idea originated in 1958 when A.W. Phillips showed a negative relationship between unemployment and nominal wage growth in Britain 2. Since then economists have looked at the relationship between unemployment and inflation 3. In the 1950s and 1960s many nations seemed to have a negative relationship between the two variables 4. The United States appears to be on one Phillips curve in the 1960s (text Figure 12.1) 5. This suggested that policymakers could choose the combination of unemployment and inflation they most desired 6. But the relationship fell apart in the following three decades (text Figure 12.2) 7. The 1970s were a particularly bad period, with both high inflation and high unemployment, inconsistent with the Phillips curve 242 Abel/Bernanke • Macroeconomics, Fifth Edition B) The expectations-augmented Phillips curve 1. Friedman and Phelps: The cyclical unemployment rate (the difference between actual and natural unemployment rates) depends only on unanticipated inflation (the difference between actual and expected inflation) a. This theory was made before the Phillips curve began breaking down in the 1970s b. It suggests that the relationship between inflation and the unemployment rate isn’t stable 2. How does this work in the extended classical model? Analytical Problem 3 looks at similar analysis in a Keynesian model. a. First case: anticipated increase in money supply (Figure 12.1; like text Figure 12.3) Figure 12.1 (1) AD shifts up and SRAS shifts up, with no misperceptions (2) Result: P rises, Y unchanged (3) Inflation rises with no change in unemployment Chapter 12 Unemployment and Inflation 243 b. Second case: unanticipated increase in money supply (Figure 12.2; like text Figure 12.4) Figure 12.2 (1) AD expected to shift up to AD 2, old (money supply expected to rise 10%), but unexpectedly money supply rises 15%, so AD shifts further up to AD 2, new (2) SRAS shifts up based on expected 10% rise in money supply...
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This note was uploaded on 04/14/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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12 - Chapter 12 Unemployment and Inflation  Learning...

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