The Phillips Curve A.P. Macroeconomics Ms. McRoy

“Aim”  What is the trade-off between inflation and unemployment in the short-run? In the long- run?

“Do-Now”  Imagine that the economy is operating at E1, but then begins to slide into a recession as a result of decreased consumer confidence. Graph the effect of this change. What is the effect on unemployment? What is the effect on aggregate price level? Aggregate Price Level Real GDP (Y) PEPE YEYE E1E1 SRAS LRAS AD

Building the Short-run Phillips Curve QfQf Price Level Y PEPE E1E1 SRAS LRAS AD QIQI QRQR AD 2 P1P1 Q1Q1 AD 1 E2E2 Q2Q2 E3E3 P2P2 Inflation Rate PEPE a SRPC P1P1 u1u1 u2u2 b Unemployment Rate u3u3 P2P2 c

Building the Short-run Phillips Curve QfQf Price Level Y PEPE E1E1 SRAS LRAS AD QIQI QRQR P1P1 Q1Q1 E2E2 Q2Q2 E3E3 P2P2 Inflation Rate PEPE a SRPC P1P1 u1u1 u2u2 b Unemployment Rate u3u3 P2P2 c SRAS 1 SRAS 2 SRPC 1 SRPC 2

The Long-run Phillips Curve 0% a SRPC 0 5% Unemployment Rate Phillips Curve Inflation Rate Suppose now, that the government passes an expansionary fiscal policy… What happens to unemployment and inflation? 3% 2% b SRPC 1 c LRPC NAIRU

 Proposed by Milton Friedman (Monetarist)  The non-accelerating inflation rate of unemployment (NAIRU) – the unemployment rate at which inflation does not change over time. Keeping unemployment below NAIRU leads to accelerating inflation and cannot be maintained. Keeping unemployment above NAIRU leads to decelerating inflation.

“Aim”  What is the trade-off between inflation and unemployment in the short-run? In the long- run?