Economics 1022B inflation and unemployment

Return 1 the costs of anticipated inflation inflation

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Unformatted text preview: l return = 3% After- tax real return = (1%) The Costs of Anticipated Inflation Inflation • Increased uncertainty – Long-term planning difficult – Gives people short-term focus The Short-Run Phillips Curve The • shows the tradeoff between inflation and unemployment, holding constant: – The expected inflation rate – The natural unemployment rate Inflation rate (percent per year) A Short-Run Phillips Curve Short-Run 20 15 b a 10 c 5 0 3 SRPC Expected inflation rate Natural Natural unemployment unemployment rate 6 9 12 Unemployment rate (percentage of labour force) Price level (GDP deflator, 1997 = 100) AS-AD and the Short-Run Phillips Curve Short-Run LAS 113 110 107 SAS1 SAS0 a 100 AD1 AD0 0 700 750 800 850 900 950 Real GDP (billions of 1997 dollars) Real Price level (GDP deflator, 1997 = 100) AS-AD and the Short-Run Phillips Curve Short-Run LAS 113 110 107 b SAS1 SAS0 a 100 AD2 AD0 0 700 750 800 850 900 950 850 Real GDP (billions of 1997 dollars) Price level (GDP deflator, 1997 = 100) AS-AD and the Short-Run Phillips Curve Short-Run LAS 113 110 107 100 b SAS1 SAS0 a c AD0 0 700 750 800 850 900 950 Real GDP (billions of 1997 dollars) Real Inflation rate (percent per year) Short-Run and Long Run Short-Run Phillips Curves Phillips LRPC 20 Decreases in expected inflation shifts short-run Phillips curve downward 15 a 10 c 7 5 0 SRPC0 SRPC1 SRPC b 3 6 9 12 Unemployment rate (percentage of labour force)...
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This document was uploaded on 04/06/2014.

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