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Macroeconomics
Lecture 20
Unemployment and Inflation
Questions
Exam 4
A. W. Phillips(1914 - 1975)
Phillips Curve
Relationshipbetween
Inflation andUnemployment
Phillips Curve
A curve that shows the short-run trade-off
between unemployment and inflation
InflationRate
Unemployment Rate
Phillips Curve
19611963
1962
1964
1965
19661967
1968
InflationRate
Unemployment Rate4% 7%
6%
2%
Phillips Curve
TradeoffHigh Inflation and Low UnemploymentLow Inflation and High Unemployment
Milton Friedman(1912 - 2006)
Is there a long term
relationshipbetween
Inflation andUnemployment?
InflationRate
Unemployment Rate
19611963
1962
1964
1965
19661967
1968
1969 19701971
1972
1973
InflationRate
Unemployment Rate
1968
1969 19701971
1972
1973
No Relationship
Milton Friedman(1912 - 2006)
No Long RunStructural
Relationshipbetween
Inflation andUnemployment
Short-Run
Long-Run
Inflation can reduce unemployment
Inflation and unemployment are unrelated
InflationRate
Unemployment Rate
Phillips -Friedman Curves
Short-Run
Long-Run
No relationshipbecause LRAS is vertical
PriceLevel
Quantity of Output
P1
AD- AS Model
Aggregate Demand
Short RunAggregateSupply
Y1 Y2
P2
Long RunAggregateSupply
P3
Natural Rate Hypothesis
The claim that unemployment returns to its normal, or natural rate regardless of the rate of
inflation
Disinflationreduction in the rate of inflation - slows down
Deflationreduction in the price level
go in reverse
1. What is the Phillips Curve?
2. What is the Friedman Curve?
3. Can inflation be good?
4. What is worse, inflation or deflation?
5. What is disinflation?
Final Exam Review
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