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