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

The output gap u un lecture 16 phillips curve

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Unformatted text preview: expected inflation ⇡ e . the output gap: U UN . Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 13/ 36 The Phillips Curve The expectations-augmented Phillips curve. Implications The expectations-augmented Phillips curve: ⇡ = ⇡e ! (U UN ) implies that if U = UN then ⇡ = ⇡e Note that in the long-run U = UN : There is no long-run trade-o↵ between unemployment and inflation. This is consistent with the classical dichotomy. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 14/ 36 The Phillips Curve The expectations-augmented Phillips curve. e PCπ =π2 SR INFLATION e π3 PCπ =π1 SR e PCπ =π3 SR e π =π0 π2 PCSR π1 π0 UPolicy UN = PCLR UNEMPLOYMENT Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 15/ 36 The Phillips Curve The expectations-augmented Phillips curve. Three important conclusions: 1 There are two types of Phillips curves: Short-run Phillips curves. Long-run Phillips curves. 2 There may be a short-run trade-o↵ between unemployment and inflation. 3 There is no long-run trade-o↵ between unemployment and inflation. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 16/ 36 The Phillips Curve The short-run expectations-augmented Phillips curve with supply shocks. The extension to include supply shocks: Supply shocks are events that a↵ect inflation that are independent of: labor-market conditions, and/or inflationary expectations. Experience with price shocks ⇢ led to the modern short-run Phillips curve: ⇡ = ⇡e Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins ! (U UN ) + ⇢ Econ 100B: Macroeconomics 17/ 36 The Phillips Curve The short-run expectations-augmented Phillips curve with supply shocks. The extension to include supply shocks: ⇡ = ⇡e ! (U UN ) + ⇢ This modern version of the Phillips curve implies that wages and prices are sticky. 1 The more flexible wages and prices are, the more they and inflation respond to the unemployment gap, i.e., ! is larger. 2 If wages and prices were completely flexible, then...
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This note was uploaded on 09/08/2013 for the course ECON 100B taught by Professor Wood during the Summer '08 term at Berkeley.

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