DOC PREVIEW
FIU ECO 3202 - Chapter 12 Unemployment and Inflation

This preview shows page 1-2-3-20-21-40-41-42 out of 42 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 42 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Chapter 12Chapter OutlineUnemployment and Inflation: Is There a Trade-off?Figure 12.1 The Phillips curve and the U.S. economy during the 1960sFigure 12.2 Inflation and unemployment in the United States, 1970-2005Unemployment and Inflation: Is There a Trade-off?Slide 7Figure 12.3 Ongoing inflation in the extended classical modelSlide 9Figure 12.4 Unanticipated inflation in the extended classical modelSlide 11Figure 12.7 The expectations-augmented Phillips curve in the United States, 1970-2005Slide 13Figure 12.5 The shifting Phillips curve: an increase in expected inflationFigure 12.6 The shifting Phillips curve: an increase in the natural unemployment rateSlide 16Slide 17Slide 18Slide 19Figure 12.8 The long-run Phillips curveThe Problem of UnemploymentSlide 22Slide 23Figure 12.9 Actual and natural unemployment rates in the United States, 1960-2005Slide 25The Problem of InflationSlide 27Slide 28Slide 29Sample Question:Slide 31Slide 32Sacrifice RatioSlide 34Slide 35Slide 36Slide 371971-1974 Wage-Price ControlSlide 39Slide 40Slide 41Figure 12.10 Expected inflation rate, 1971 to 2006© 2008 Pearson Addison-Wesley. All rights reservedChapter 12Unemployment and Inflation© 2008 Pearson Addison-Wesley. All rights reserved12-2Chapter Outline•Unemployment and Inflation: Is There a Trade-Off?–Important•The Problem of Unemployment•The Problem of Inflation© 2008 Pearson Addison-Wesley. All rights reserved12-3Unemployment and Inflation: Is There a Trade-off? •Many people think there is a trade-off between inflation and unemployment–The idea originated in 1958 when A.W. Phillips showed a negative relationship between unemployment and nominal wage growth in Britain–In the 1950s and 1960s many nations seemed to have a negative relationship between the two variables–The United States appears to be on one Phillips curve in the 1960s (Fig. 12.1)–The 1970s were a particularly bad period, with both high inflation and high unemployment, inconsistent with the Phillips curve. (stagflation!)© 2008 Pearson Addison-Wesley. All rights reserved12-4Figure 12.1 The Phillips curve and the U.S. economy during the 1960s© 2008 Pearson Addison-Wesley. All rights reserved12-5Figure 12.2 Inflation and unemployment in the United States, 1970-2005© 2008 Pearson Addison-Wesley. All rights reserved12-6Unemployment and Inflation: Is There a Trade-off?•The expectations-augmented Phillips curve–Friedman and Phelps: The cyclical unemployment rate (the difference between actual and natural unemployment rates) depends only on unanticipated inflation (the difference between actual and expected inflation)•This theory was made before the Phillips curve began breaking down in the 1970s•It suggests that the relationship between inflation and the unemployment rate isn’t stable • )( uuhe© 2008 Pearson Addison-Wesley. All rights reserved12-7Unemployment and Inflation: Is There a Trade-off?•The expectations-augmented Phillips curve–How does this work in the extended classical model?•First case: anticipated increase in money supply (Fig. 12.3) –AD shifts up and SRAS shifts up, with no misperceptions–Result: P rises, Y unchanged–Inflation rises with no change in unemployment© 2008 Pearson Addison-Wesley. All rights reserved12-8Figure 12.3 Ongoing inflation in the extended classical model© 2008 Pearson Addison-Wesley. All rights reserved12-9Unemployment and Inflation: Is There a Trade-off?•The expectations-augmented Phillips curve–How does this work in the extended classical model?•Second case: unanticipated increase in money supply (Fig. 12.4) –AD expected to shift up to AD2,old (money supply expected to rise 10%), but unexpectedly money supply rises 15%, so AD shifts further up to AD2,new–SRAS shifts up based on expected 10% rise in money supply–Result: P rises and Y rises as misperceptions occur–So higher inflation occurs with lower unemployment–Long run: P rises further, Y declines to full-employment level© 2008 Pearson Addison-Wesley. All rights reserved12-10Figure 12.4 Unanticipated inflation in the extended classical model© 2008 Pearson Addison-Wesley. All rights reserved12-11Unemployment and Inflation: Is There a Trade-off?•The expectations-augmented Phillips curve (12.1)•When   e, u  •When   e, u  •When   e, u  •The Phillips curve is drawn such that   e when u  u( )eh u up p= - -uuu© 2008 Pearson Addison-Wesley. All rights reserved12-12Figure 12.7 The expectations-augmented Phillips curve in the United States, 1970-2005© 2008 Pearson Addison-Wesley. All rights reserved12-13Unemployment and Inflation: Is There a Trade-off?•The shifting Phillips curve–The Phillips curve shows the relationship between unemployment and inflation for a given expected rate of inflation and natural rate of unemployment–Higher expected inflation shifts the Phillips curve to the right•Fig. 12.5–Higher natural rate of unemployment shifts the Phillips curve to the right•Fig. 12.6( )eh u up p= - -huue© 2008 Pearson Addison-Wesley. All rights reserved12-14Figure 12.5 The shifting Phillips curve: an increase in expected inflation© 2008 Pearson Addison-Wesley. All rights reserved12-15Figure 12.6 The shifting Phillips curve: an increase in the natural unemployment rate© 2008 Pearson Addison-Wesley. All rights reserved12-16Unemployment and Inflation: Is There a Trade-off?•Supply shocks and the Phillips curve–A supply shock increases both expected inflation and the natural rate of unemployment•A supply shock in the classical model increases the natural rate of unemployment, because it increases the mismatch between firms and workers•A supply shock in the Keynesian model reduces the marginal product of labor and thus reduces labor demand at the fixed real wage, so the natural unemployment rate rises–an adverse supply shock shifts the Phillips curve up and to the right© 2008 Pearson Addison-Wesley. All rights reserved12-17Unemployment and Inflation: Is There a Trade-off?•Macroeconomic policy and the Phillips curve•Q: Can the Phillips curve be exploited by policymakers? •Classical model: NO –The unemployment rate returns to its natural level quickly, as people’s expectations adjust–So unemployment can change from its natural level only for a very brief time–Also, people catch on to policy games; they have rational expectations and try to anticipate


View Full Document
Download Chapter 12 Unemployment and Inflation
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 12 Unemployment and Inflation and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 12 Unemployment and Inflation 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?