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Macroeconomics 22.docx

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ECON 201

Macroeconomics Chapter 22  The Short-run Trade-off between Inflation and Unemployment  Phillips Curve: a curve that shows the short-run trade-off between inflation and unemployment.  Low unemployment has high inflation  The Phillips curve shows the combinations of inflation and unemployment that arise in the short run as shifts in theAD curve move the economy along the short-runAS curve.  Higher price level = higher inflation (highAD) • This leads to less unemployment (more output)  Shifts in the Phillips Curve: Role of Expectations  Long run: monetary policy influences nominal variables (price level and inflation rate) but not real variables (output and unemployment).  Vertical LRAS and Phillips curve (natural rate)  Natural Rate  Beyond the influence of monetary policy  Can be influenced by other policies like min wage, collective bargaining, unemployment insurance, and job training programs. (SHIFT)  Expected inflation: measures how much people expect the overall price level to change. (create by increasing money supply)  Short Run  Unemployment rate = natural rate of unemployment – a (actual inflation – expected inflation) • Relates the unemployment rate to the natural rate of unemployment, act
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