 Under normal circumstances, there is a short-run tradeoff between inflation & unemployment  Aggregate supply shocks can cause both higher inflation and higher unemployment  There is no significant tradeoff between inflation and unemployment over long periods of time 1©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

Unemployment Rate (Percent) Annual Rate of Inflation (Percent) Unemployment Rate (Percent) Concept Empirical Data Data for the 1960s 62 2©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

Real Domestic Output Price Level 0 P0P0 P1P1 P2P2 P3P3 Q0Q0 Q1Q1 Q2Q2 Q3Q3 AD 0 AD 1 AD 2 AD 3 AS LO ©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

 In the late 1970s and early 1980s, the economy experienced stagflation 4©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

 OPEC and Energy Prices  Other shocks:  Agricultural shortfalls  Dollar depreciation  Wage increases after wage-price controls lifted  Declining productivity 5©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

6©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

 By the late ‘80s, it appeared the Phillips curve had shifted back  Recession of ‘81-’83  Increased foreign competition  Deregulation of airlines and trucking  Decline in OPEC’s power  These factors also helped to reduce per-unit production costs and to shift the short-run AS curve rightward 7©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

Source: Bureau of Labor Statistics,stats.bls.gov LO ©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3