ch17 - CHAPTER CHECKLIST When you have completed your study...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe the short-run policy tradeoff between inflation and unemployment. 1 Distinguish between the short-run and long-run Phillips curves and describe the shifting tradeoff between inflation and unemployment. 2 Explain how the Fed can influence the expected inflation rate and how expected inflation influences the short-run tradeoff. 3
Background image of page 2
17.1 THE SHORT-RUN PHILLIPS CURVE Short-run Phillips curve A curve that shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant. Figure 17.1 on the next slide shows a short- run Phillips curve.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
17.1 THE SHORT-RUN PHILLIPS CURVE The natural unemployment rate is 6 percent. This combination, at point B , provides the anchor point for the short- run Phillips The expected inflation rate is 3 percent a year.
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
17.1 THE SHORT-RUN PHILLIPS CURVE The short-run Phillips curve passes through points A , B , and C and is the curve SRPC . A lower unemployment rate brings a higher inflation rate, such as at point A . A higher unemployment rate brings a lower inflation rate, such as at point C .
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
17.1 THE SHORT-RUN PHILLIPS CURVE Aggregate Supply and the Short-Run Phillips Curve The AS-AD model provides an analogy to the negative relationship between unemployment and inflation along the short- run Phillips curve. The short-run Phillips curve is another way of looking at what lies behind the upward- sloping aggregate supply curve, but switching from price-level to rate of inflation . Both curves arise because the money wage
Background image of page 8
17.1 THE SHORT-RUN PHILLIPS CURVE When the price level changes but the money wage rate doesn’t change, the real wage rate changes and so does the quantity of labor demanded and the quantity of real GDP supplied. This change in real GDP and employment also changes the unemployment rate, and the change in the price level also changes the inflation rate. Our AS argument was about the price level; the Phillips Curve is an empirical observation – what actually happens – that
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
17.1 THE SHORT-RUN PHILLIPS CURVE Unemployment and Real GDP At full employment, the quantity of real GDP is potential GDP and the unemployment rate is the natural unemployment rate – also known as NAIRU, which stands for Non-Accelerating Inflation Rate of Unemployment . If real GDP exceeds potential GDP, employment exceeds its full-employment level and the unemployment rate falls below the natural unemployment rate. With unemployment below NAIRU, inflation
Background image of page 10
17.1 THE SHORT-RUN PHILLIPS CURVE Similarly, if real GDP is less than potential GDP, employment is less than its full employment level and the unemployment rate rises above the natural unemployment rate. Okun’s Law
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 61

ch17 - CHAPTER CHECKLIST When you have completed your study...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online