The Phillips Curves Module 34. Figure 34.1 Unemployment and Inflation, 1955–1968 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright.

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The Phillips Curves Module 34

Figure 34.1 Unemployment and Inflation, 1955–1968 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers Inflation v. Unemployment

Relationship Between Inflation and Unemployment Economists noted that in the short run the inflation rate and unemployment rate have an inverse relationship The lower the unemployment rate, the higher the inflation rate This is represented by the Phillips Curve

Figure 34.2 The Short-Run Phillips Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers The Short Run Phillips Curve

Shifts in the SRPC The events of the 1970s and 1980s illustrated that the SRPC is not fixed – it can shift over time. Shifts in the SRAS curve can lead to shifts in the SRPC. – A negative supply shock shifts the SRPC up (to the right)

Figure 34.3 The Short-Run Phillips Curve and Supply Shocks Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

So inflate to reduce unemployment? Not too fast! Expected inflation can shift the SRPC up and lead to greater inflation – At every unemployment rate, there will be a greater inflation rate

Figure 34.4 Expected Inflation and the Short-Run Phillips Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

The Long Run Phillips Curve Attempting to use inflation to keep unemployment low will result in accelerating inflation due to expectations The only way to reduce these expectations (and thus the actual inflation rate) is through increases in unemployment

The Long Run Phillips Curve As a result, in the long run, we will return to a particular value of unemployment – Non-accelerating inflation rate of unemployment – NAIRU Thus, in the long run, the Phillips Curve is a vertical line at the NAIRU

Figure 34.5 The NAIRU and the Long-Run Phillips Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

What does NAIRU represent? The level of unemployment that will not create inflationary (or deflationary) expectations Thus – no recessionary or inflationary gap exists Therefore NAIRU = Natural Unemployment Rate

Unnumbered Figure 34.2 The Great Disinflation of the 1980s Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers