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Chapter 22

ECON 201 Chapter 22: Chapter22TheShort-RunTrade-offBetweenInflationandUnemployment.pdf


Department
Economics
Course Code
ECON 201
Professor
Sarna
Chapter
22

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Chapter22:TheShortRunTradeoffBetweenInflationandUnemployment
ThePhillipsCurveacurvethatshowstheshortruntradeoffbetweeninflationandunemployment
○ OriginsofthePhillipsCurve
■ 1958:A.WPhillipsshowedthatnominalwagegrowthwasnegativelycorrelated
withunemploymentintheU.K
■ 1960:PaulSamuelsonandRobertSolowfoundanegativecorrelationbetweenU.S
inflationandunemployment,namedit“thePhillipsCurve”
○ AggregateDemand,AggregateSupply,andthePhillipsCurve
■ ThePhillipscurveshowsthe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
■ AnincreaseintheADforgoodsandservicesleads,intheshortrun,toalarger
outputofgoodsandservicesandahigherpricelevel
● Largeroutputmeansgreateremployment
● Lowerunemploymentrate
● Ahigherpricelevelmeansahigherrateofinflation
● Shiftsinflationandunemploymentinoppositedirectionsintheshortrun
ShiftsinthePhillipsCurve:TheRoleofExpectations
○ TheLongRunPhillipsCurve
■ 1968:MiltonFriedmanandEdmundPhelpsarguedthatthetradeoffwastemporary
■ Verticalinthelongrun
Naturalratehypothesistheclaimthatunemploymenteventuallyreturnstoits
normalor“natural”rate,regardlessoftheinflationrate
● Growthinthemoneysupplydeterminestheinflationrate
● Regardlessoftheinflationrate,theunemploymentrategravitatestoward
itsnaturalrate
○ ReconcilingTheoryandEvidence
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