ECON 102 1st Edition Lecture 32 Outline of Last Lecture 1 Causes of Inflation 2 Printing Money a Tax Seignorage 3 Short Run Phillips Curve Outline of Current Lecture I II III Short Run Phillips Curve Cont Natural Rate of Unemployment Deflation a Effects of Deflation Current Lecture Short run Phillips Curve The short run Phillips curve is the negative short run relationship between unemployment and the inflation rate o A negative supply side shock shifts SRPC up o A positive supply side shock shifts SRPC down Natural Rate of Unemployment The natural rate of unemployment is the portion of the unemployment rate unaffected by the swings of the business cycle The NAIRU is another name for the natural rate The level of unemployment the economy needs in order to avoid accelerating inflation is equal to the natural rate of unemployment In fact economists estimate the natural rate of unemployment by looking for evidence about the NAIRU from the behavior of the inflation rate and the unemployment rate over the course of the business cycle Once inflation has become embedded in expectations getting inflation back down can be difficult because disinflation can be very costly requiring the sacrifice of large amounts of aggregate output and imposing high levels of unemployment Deflation Debt deflation the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation Effects of Expected Deflation o There is a zero bound on the nominal interest rate it cannot go below zero These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o A situation in which monetary policy can t be used because nominal interest rates cannot fall below the zero bound is known as a liquidity trap A liquidity trap can occur whenever there is a sharp reduction in demand for loanable funds
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