Intermediate Macroeconomics Lecture 10
Intermediate Macroeconomics Lecture 10
Inflation, Unemployment, and the Phillips curve a Phillips Curve: relationship between inflation and unemployment A W. Phillips(1958)The relationship between unemployment and the rate of change of money wages in the united kingdom 1861 1957. Economica 25
Inflation, Unemployment, and the Phillips Curve ◼ Phillips Curve: relationship between inflation and unemployment A.W.Phillips (1958) “The relationship between unemployment and the rate of change of money wages in the united kingdom, 1861- 1957,” Economica 25
Inflation, Unemployment, and the Phillips Curve 1861-1913 Original Phillips Curve =-8(-
Inflation, Unemployment, and the Phillips Curve ◼ 1861-1913 Original Phillips Curve ( *) w g u u = − − w g u
Inflation, Unemployment, and the Phillips Curve Inflation rate and unemployment rate in the U.S. after 1961 80.81 75 7 71 69 72 76 82.83 61 u
Inflation, Unemployment, and the Phillips Curve ◼ Inflation rate and unemployment rate in the U.S. after 1961 61 69 71 72 73 74 75 76 79 80,81 82,83 84 86 89 92 97 u
Phillips curve Inflation rate depends on ① Expected inflation 2 The deviation of unemployment from the natural rate(cyclical unemployment 3 Supply shocks 丌=x2-B(-")+E
Phillips Curve ◼ Inflation rate depends on ① Expected inflation ② The deviation of unemployment from the natural rate (cyclical unemployment) ③ Supply shocks = − ( − ) + e n
From as to the philips curve .AS: Y=Y+a(P-pe P=P+-(Y-) P-P1=P-P1+-(Y-Y) x=x+-(Y-Y) Phillips Curve -B-4)+8
From AS to the Phillips Curve ◼ AS: ◼ Phillips Curve: ( ) e Y = Y+ P − P − ( ) 1 − P = P + Y −Y e ( ) 1 1 1 − P − P− = P − P− + Y −Y e ( ) 1 − = + Y −Y e = − ( − ) + e n
Expectations and Inflation Inertia 丌=1-B(1)+E Why is our money ever less valuable? Perhaps it is simply that we have inflation because we expect inflation, and we expect inflation because we had it Robert solow
Expectations and Inflation Inertia “Why is our money ever less valuable? Perhaps it is simply that we have inflation because we expect inflation, and we expect inflation because we had it.” Robert Solow = −1 e = − − + − ( ) 1 n
The Two Causes of Rising and Falling Inflation yclical unemployment demand-pull inflation High AD> high employment B. Supply shock cost-push inflation Adverse supply shocks
The Two Causes of Rising and Falling Inflation A. Cyclical unemployment --- “demand-pull inflation” High AD → high employment B. Supply shock ---”cost-push inflation” Adverse supply shocks
SR Tradeoff between Inflation and Unemployment 丌=x-B(-1")+E Expected inflation and supply shock cannot be controlled by the government. Therefore, the only channel is to use monetary and fiscal policy to change AD to affect the unemployment rate M↓OrG↓→AD↓u↑→ infation
SR Tradeoff Between Inflation and Unemployment ◼ Expected inflation and supply shock cannot be controlled by the government. Therefore, the only channel is to use monetary and fiscal policy to change AD to affect the unemployment rate M ↓ or G ↓ → AD ↓ → u ↑→ inflation ↓ ( ) e n = − − +
SR Tradeoff between Inflation and Unemployment Higher expected inflation
SR Tradeoff Between Inflation and Unemployment Higher expected inflation