Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #1 The Phillips Curve Understanding the Relationship Between Inflation and.

Slides:



Advertisements
Similar presentations
Putting All Markets Together: The AS-AD Model
Advertisements

Chapter 13: Aggregate Supply
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 8 Inflation: Its Causes and Cures.
The Phillips curve In last week’s lecture, we brought the labour market equations into the IS-LM framework and derived the aggregate supply-aggregate demand.
The Medium Run III: The Phillips Curve ¿Cómo se relacionan entre sí la Tasa de Inflación y la Tasa de Paro en el Corto y en el Mediano Plazo?
We turn to short-run output, the gap between actual GDP and potential GDP Fluctuations in economic activity can be costly The rate of inflation tends to.
The Phillips Curve: The Early Incarnation, Circa 1960.
© 2003 Prentice Hall Business PublishingMacroeconomics, 3/eOlivier Blanchard Prepared by: Fernando Quijano and Yvonn Quijano 8 C H A P T E R The Natural.
CHAPTER 7 © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard Putting All Markets Together: The AS-AD Model Prepared by: Fernando.
The Natural Rate of Unemployment and the Phillips Curve
Chapter 7: The AS-AD ModelBlanchard: Macroeconomics Slide #1 The AS-AD Model Determination of Output in the short-run and medium-run Requires equilibrium.
CHAPTER 8 © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard The Natural Rate of Unemployment and the Phillips Curve Prepared.
Review Review of IS-LM AS-AD Model Jenny Xu
The Labor Market: The Medium Run
The Relationship Between Inflation and Unemployment An inverse relationship between inflation and unemployment until the 1970s 1970s  high inflation and.
8 Prepared by: Fernando Quijano and Yvonn Quijano And Modified by Gabriel Martinez C H A P T E R The Natural Rate of Unemployment and the Phillips Curve.
CHAPTER 32 Labor Markets, Unemployment and Inflation PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved.
Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #1 The Phillips Curve:
Aggregate Supply and the Phillips Curve
Macroeconomic Equilibrium Chapter 8. Potential GDP Potential GDP: the level of real GDP associated with full employment –sustainable upper limit of production.
7-1 Aggregate Supply The aggregate supply relation captures the effects of output on the price level. It is derived from the behavior of wages and prices.
Chapter 16: Inflation, Unemployment, and Federal Reserve Policy © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien,
The Labor MarketEcon 302 Slide #1 The Labor Market: The Medium Run Higher production requires an increase in employment Higher employment reduces unemployment.
Aggregate Supply and the Phillips Curve. AD/AS and the Phillips Curve The Aggregate Demand/Supply Model illustrates the short-run relationship between.
Macroeconomics Prof. Juan Gabriel Rodríguez
The Phillips Curves Module 34. Figure 34.1 Unemployment and Inflation, 1955–1968 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright.
Copyright 2005 © McGraw-Hill Ryerson Ltd.Slide 0.
CHAPTER 32 Labor Markets, Unemployment and Inflation PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved.
Chapter 18 Stabilization in an Integrated World Economy.
ECO Global Macroeconomics TAGGERT J. BROOKS.
Inflation and Unemployment: The Phillips Curve Can Governments Lower Unemployment at No Cost?
Chapter Thirty The Labor Market, Unemployment, and Inflation.
Output, Unemployment, & Inflation
Aggregate Demand and Aggregate Supply
Chapter 7: The AS-AD ModelBlanchard: Macroeconomics Slide #1 Chapter Topics Aggregate Supply Aggregate Demand Equilibrium Output in Short and Medium Run.
The Phillips Curve, the Natural Rate of Unemployment, and Inflation
The AS-AD ModelEcon 302 Slide #1 The AS-AD Model Requires equilibrium in the goods, financial, and labor markets Aggregate supply focuses on equilibrium.
Chapter 25 Aggregate Demand and Aggregate Supply.
April 14, The Phillips Curve 2.Return & Review Fiscal Policy FRQ Quiz & Unit Exam 3.Unit Study Guide 4.Return All Other work Unit IV Exam: Thursday,
CHAPTER 8 © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard The Natural Rate of Unemployment and the Phillips Curve Prepared.
The Phillips Curve. Intro to Phillips Curve  There is a short-run trade-off between unemployment and inflation  Lower unemployment leads to higher inflation.
Aggregate Equilibrium. Review: AD, SRAS, & LRAS  AD = Sum of all demands for all the goods and services in all final markets  AD = C + G + I + X - M.
Short-run Policy Tradeoff Chapter 17. Short-run Phillips Curve A curve showing the relationship between the inflation rate and the unemployment rate in.
Module Inflation and Unemployment: The Phillips Curve KRUGMAN'S MACROECONOMICS for AP* 34 Margaret Ray and David Anderson.
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. RUDIGER DORNBUSCH STANLEY FISCHER RICHARD STARTZ macroeconomics ELEVENTH.
Chapter 16 Econ 104 Parks The Phillips Curve © OnlineTexts.com p. ‹#›
BU204 Unit 9 Seminar Chapter 8 Labor Markets, Unemployment, and Inflation.
Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together.
Inflation and Unemployment: The Phillips Curve
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective PowerPoints on the Web, 2 nd edition © Pearson Education Limited 2014 CHAPTER.
BRINNER 1 13.ppt Integrating Inflation into IS-LM to Create a Dynamic Equilibrium Model of the Economy Lecture 13.
Chapter 9: Inflation, Activity, and Money GrowthBlanchard: Macroeconomics Slide #1 Inflation, Activity, & Money Growth – The Medium Run The links between.
The Phillips curve There is a short-run tradeoff between inflation and employment.
INFLATION 12 CHAPTER. Objectives After studying this chapter, you will able to  Distinguish between inflation and a one-time rise in the price level.
Phillips curves. The original Phillips curve The original Phillips curve.
Topic 9 Aggregate Demand and Aggregate Supply 1. 2 The Aggregate Demand Curve When price level rises, money demand curve shifts rightward Consequently,
The Natural Rate of Unemployment and the Phillips Curve
Chapter 26 The Neoclassical Perspective
Aggregate Demand and Aggregate Supply
Aggregate Supply and the Phillips Curve
The Phillips Curve.
ENSURING PRICE STABILITY Chapter 12
KRUGMAN’S Economics for AP® S E C O N D E D I T I O N.
Phillips Curve.
Section 4 Module 18.
Inflation and Unemployment and the Phillips Curve
Inflation: Its Causes and Cures
A Little Economics Joke…
The Phillips Curve, the Natural Rate of Unemployment, and Inflation
AS-AD curves: how natural is the natural rate of unemployment?
Presentation transcript:

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #1 The Phillips Curve Understanding the Relationship Between Inflation and Unemployment

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #2 The Phillips Curve-Understanding the Relationship Between Inflation and Unemployment An inverse relationship between inflation and unemployment until the 1970s 1970s high inflation and unemployment Is there still a relationship between inflation and unemployment?

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #3 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment From our wage setting – price setting model: W t = P t e F(u t,z) and P t = (1+µ) W t Lets assume that F(u t,z) = 1-  u t +z Then P t = P t e (1+µ)F(u t,z) P t = P t e (1+µ) (1-  u t +z)

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #4 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment From P t = P t e (1+µ) (1-  u t +z) We can derive  t =  t e + (µ+z)-  u t where  t = the inflation rate  t e = the expected inflation rate

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #5 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Observations:  t =  t e + (µ+z) -  u t Observations:  t =  t e + (µ+z) -  u t Higher expected inflation leads to higher inflation Given expected inflation, the higher the µ or z, the higher inflation Given expected inflation, the higher unemployment, the lower inflation

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #6 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment The Early Incarnation, Circa 1960 Average inflation close to zero  t e = O  t = (µ+z) -  u t Low unemployment leads to high wage increases leads to high price increases leads to high wage increases in a wage – price spiral.

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #7 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment The Early Incarnation, Circa 1960

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #8 1970s: Why did the Phillips curve vanish? higher oil prices increased µ and inflation became persistent and positive

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #9 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Inflation & Expectations

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #10 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Inflation & Expectations Assume: the effect of last year’s inflation rate on this year’s expected inflation rate the higher the value of , the higher the expected inflation rate

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #11 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Mutations & Expectations : Inflation low and not persistent  = 0,  t e =   t-1 = 0 and  t = (µ+z) –  u t (the normal Phillips Curve)

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #12 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Mutations & Expectations 1970s: Inflation high and persistent  started to increase to 1  t =   t-1 + (µ+z) –  u t (   t-1 =  t e ) The inflation rate depends on: The unemployment rate (u t ) Last year’s inflation rate (   t-1 )

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #13 The Phillips Curve – Understanding Inflation, Expected Inflation, and Unemployment Inflation & Expectations When:  t =   t-1 + (µ+z) –  u t and  = 1 Aggregate supply =  t –  t-1 = (µ+z) –  u t Therefore:The unemployment rate affects the change in the inflation rate High unemployment decreases inflation the inflation rate

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #14 Inflation & Expectations :  t –  t-1 = 6.5% – 1.0u t Inflation & Expectations :  t –  t-1 = 6.5% – 1.0u t

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #15 The Phillips Curve – Back to the Natural Rate of Unemployment At the natural rate of unemployment (u n ): The actual inflation rate = expected inflation rate  t =  t e At the natural rate of unemployment (u n ): The actual inflation rate = expected inflation rate  t =  t e Given:  t –  t e + (µ+z) –  u n Then: 0 = (µ+z) –  u n

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #16 Given: Then:  u n = µ + z Given:  t =  t e + (µ+z) –  u t Then:  t =  t e +  u n –  u t  t –  t e = -  (u t – u n ) u t – u n   t =  t e The Nonaccelerating Inflation Rate of Unemployment (NAIRU)

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #17 Summary: shows that: Inflation increases when u t > u n Inflation decreases when u t < u n However: the relation can shift The Phillips Curve – A Summary and Many Warnings The AS relation:  t –  t-1 = -  (u t – u n )

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #18 The Phillips Curve – Differences in the Natural Rate Across Countries Changes in u and z The composition of the labor force The structure of wage bargaining Unemployment benefits Can you think of others? L t u n    µ and z are assumed consistent

Chapter 8: The Phillips Curve-The Medium RunBlanchard: Macroeconomics Slide #19 The Phillips Curve – Differences in the Natural Rate Across Countries Europe in the 1990s The Limits of Our Understanding