Lecture16+-+The+Phillips+Curve+and+Aggregate+Supply

J hawkins econ 100b macroeconomics 7 36 10 the

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Unformatted text preview: gate Supply: R. J. Hawkins Econ 100B: Macroeconomics 7/ 36 10 The Phillips Curve Fed inflation-fighting credibility restored. 14 60-70 76-84 85-95 12 INFLATION (%) 10 8 6 4 2 0 -2 3 4 5 6 7 8 9 UNEMPLOYMENT (%) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 8/ 36 10 The Phillips Curve Natural rate of unemployment declines further? 14 60-70 76-84 85-95 96-07 12 INFLATION (%) 10 8 6 4 2 0 -2 3 4 5 6 7 8 9 UNEMPLOYMENT (%) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 9/ 36 10 The Phillips Curve The financial crisis of 2008 and beyond. 14 08-13 60-70 76-84 85-95 96-07 12 INFLATION (%) 10 8 6 4 2 0 -2 3 4 5 6 7 8 9 UNEMPLOYMENT (%) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 10/ 36 10 The Phillips Curve Early modification The Phillips curve also implies an inverse relationship between nominal wages and unemployment. A major flaw in the original Phillips curve analysis was that it failed to distinguish between nominal wages and real wages. 1 Labor market incentives for working and hiring are determined by real, not nominal, wages. 2 If workers and businesses expect inflation to increase, they will also adjust nominal wages higher so that the real wage does not fall. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 11/ 36 The Phillips Curve Early modification This suggests there is a positive one-for-one relationship between wages and inflation and expected inflation. In the long-run, when all wages and prices are completely flexible, unemployment would be at the natural rate of unemployment, UN . 1 This is also called the full-employment level of unemployment. 2 This is the unemployment rate consistent with the economy’s long-run steady state. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 12/ 36 The Phillips Curve The expectations-augmented Phillips curve Incorporating these changes, the Phillips curve becomes the expectations-augmented Phillips curve: ⇡ = ⇡e ! (U UN ) =C0-C1 which gives inflation ⇡ as a function of...
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