ch173 - CHAPTER CHECKLIST <When you have completed your...

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Cobbe ECO2013 Fall 2003 Chapter 17 P. 1 of 14 < 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 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.
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Cobbe ECO2013 Fall 2003 Chapter 17 P. 2 of 14 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 curve. The expected inflation rate is 3 percent a year. 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 . 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 rate is sticky in the short run.
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Cobbe ECO2013 Fall 2003 Chapter 17 P. 3 of 14 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 recognizes that the price level is not constant, but typically is changing. So what really happens is inflation speeds up or slows down. 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.
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ch173 - CHAPTER CHECKLIST &lt;When you have completed your...

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