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Lec11handout - The Short-Run Trade-off between Inflation...

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The Short-Run Trade-off between Inflation and Unemployment Slides 11 July 27 2010 1 Intro Macro
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The Phillips Curve Phillips curve Shows the short-run trade-off Between inflation and unemployment Origins of the Phillips curve 1958, economist A. W. Phillips “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861 –1957” Negative correlation between the rate of unemployment and the rate of inflation 2 Intro Macro
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The Phillips Curve Aggregate demand (AD), aggregate supply (AS), and the Phillips curve Phillips curve Combinations of inflation and unemployment That arise in the short run As shifts in the aggregate-demand curve Move the economy along the short-run aggregate- supply curve 5 Intro Macro
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Shifts in Phillips Curve: Role of Expectations The long-run Phillips curve Is vertical If the Fed increases the money supply slowly Inflation rate is low Unemployment natural rate If the Fed increases the money supply quickly Inflation rate is high Unemployment natural rate Unemployment - does not depend on money growth and inflation in the long run 8 Intro Macro
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Shifts in Phillips Curve: Role of Expectations The long-run Phillips curve Expression of the classical idea of monetary neutrality Increase in money supply Aggregate-demand curve shifts right Price level increases Output natural rate Inflation rate increases Unemployment natural rate 10 Intro Macro
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Shifts in Phillips Curve: Role of Expectations The meaning of “natural” Natural rate of unemployment Unemployment rate toward which the economy gravitates in the long run Not necessarily socially desirable Not constant over time Labor-market policies Affect the natural rate of unemployment Shift the Phillips curve 12 Intro Macro
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Shifts in Phillips Curve: Role of Expectations The meaning of “natural” Policy change - reduce the natural rate of unemployment Long-run Phillips curve shifts left Long-run aggregate-supply shifts right For any given rate of money growth and inflation Lower unemployment Higher output 13 Intro Macro
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This document was uploaded on 10/28/2011 for the course 220 103 at Rutgers.

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Lec11handout - The Short-Run Trade-off between Inflation...

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