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Under normal circumstances, there is a short-run tradeoff between inflation & unemployment
Aggregate supply shocks can cause both higher inflation and higher unemployment
There is no significant tradeoff between inflation and unemployment over long periods of time
1©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7
Unemployment Rate (Percent)An
nu
al R
ate
of
Infl
ati
on
(P
erc
en
t)
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7
An
nu
al R
ate
of
Infl
ati
on
(P
erc
en
t)
Unemployment Rate (Percent)
69
68
6766
65
64
63
61
ConceptEmpirical DataData for the 1960s
62
2©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
Real Domestic Output
Pri
ce L
evel
0
P0
P1
P2
P3
Q0 Q1 Q2Q3
AD0
AD1
AD2
AD3
AS
LO3 18-3 3©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
In the late 1970s and early 1980s, the economy experienced stagflation
4©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
OPEC and Energy PricesOther shocks:
Agricultural shortfalls Dollar depreciation Wage increases after wage-price controls
lifted Declining productivity
5©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
6©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
By the late ‘80s, it appeared the Phillips curve had shifted back Recession of ‘81-’83 Increased foreign competition Deregulation of airlines and trucking Decline in OPEC’s power
These factors also helped to reduce per-unit production costs and to shift the short-run AS curve rightward
7©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
15
10
5
1999 2001 2003 2005 2007 2009
Source: Bureau of Labor Statistics,stats.bls.gov
LO4 18-8 8©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3
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