1. Unemployment, Inflation, and Growth Chapter 15

2. 2 ©1999 South-Western College Publishing Figure 15.1 GDP and Its Natural Path GDP Time Y*Y* Y

3. 3 ©1999 South-Western College Publishing Figure 15.2A Growth and the Real Wage L*L* Y*Y* 1 Y* – Y* 21 = g Quantity of output supplied Y*Y* 1 Y*Y* 2 Quantity of labor employed Production function in year 1 Production function in year 2 Panel A

4. 4 ©1999 South-Western College Publishing Figure 15.2B Growth and the Real Wage  (Real wage)  2 Quantity of labor employed L*L* Panel B  1 U*U* Labor supply Demand for labor in year 2 Demand for labor in year 1

5. 5 ©1999 South-Western College Publishing Figure 15.3 (Classical) Inflation and Growth Inflation rate  P PP  Aggregate supply  M PP P MM M – g = Slope of the aggregate demand curve is -1. Growth rate of output  YY Y  Aggregate demand g

6. 6 ©1999 South-Western College Publishing Figure 15.4A Y 1 Y – Y 21 < g Quantity of output supplied Y 2 Y*Y* 2 Quantity of labor employed Y*Y* 1 Y 1 = L2L2 Production function in year 2 Production function in year 1 Real Wage Growth and Aggregate Supply: The Neoclassical Model Panel A

7. 7 ©1999 South-Western College Publishing Figure 15.4B Quantity of labor employed L2L2 Real Wage Growth and Aggregate Supply: The Neoclassical Model Panel B =  1  *  *       > g  (Real wage) L 1 = L * U 2 > U * U 1 >U * Demand for labor in year 1 Demand for labor in year 2

8. 8 ©1999 South-Western College Publishing Box 15.1 The Third Industrial Revolution Productivity (left scale) Real wage (right scale) Index of productivity Index of real wage 0.025 0.030 0.035 0.040 0.045 0.0500.30 0.25 0.20 0.15 ’55’60’65’70’75’80’85’901930’50’45’35’40 Productivity and the real wage move together. Beginning in 1974 they both slowed down.

9. 9 ©1999 South-Western College Publishing Figure 15.5 g Slope of the SRAS curve is b. SRAS LRAS Growth rate of output (  Y/Y) Inflation rate (  P/P)   ww w - g Dynamic Aggregate Supply in the Neoclassical Model

10. 10 ©1999 South-Western College Publishing Figure 15.6A ’52’53’54’55’56’57’58’591949’51’50 Percentage per year 0.0 2.0 4.0 6.0 8.0 10 The History of Inflation, 1949–1959 Price inflation

11. 11 ©1999 South-Western College Publishing Figure 15.6B ’62’63’64’65’66’67’68’691959’61’60 Percentage per year 0.0 2.0 4.0 6.0 8.0 10 The History of Inflation, 1959–1969 Price inflation

12. 12 ©1999 South-Western College Publishing Figure 15.7A Wage Inflation and Unemployment Panel A: 1949–1959 Wage inflation (percentage per year) Unemployment rate percentage 2 4 6 8 10 0 2468 0 The slope of the Phillips curve in this sample is -2. 1951 1955 1956 1957 1952 1953 1954 1949 1958 1950 1959

13. 13 ©1999 South-Western College Publishing Figure 15.7B Wage Inflation and Unemployment Panel B: 1959–1969 Wage inflation (percentage per year) Unemployment rate percentage 2 4 6 8 10 0 2468 0 This is the same curve as the one in panel A 1969 1968 1966 1967 1965 1960 1961 1963 1962 1959 1964

14. 14 ©1999 South-Western College Publishing Figure 15.8A Inflation rate (  P/P)   MM M - g g The Neoclassical Model Panel A Dynamic long-run aggregate supply curve Dynamic short- run aggregate supply curve Growth rate of output (  Y/Y)

15. 15 ©1999 South-Western College Publishing Figure 15.8B Inflation rate (  P/P) g The Neoclassical Model   ww w - g Panel B Dynamic long- run aggregate supply curve Dynamic short- run aggregate supply curve Growth rate of output (  Y/Y)

16. 16 ©1999 South-Western College Publishing Figure 15.8C The Neoclassical Model Panel C Natural rate of unemployment (Excess wage inflation)  ww w - g  Unemployment rate U*U* PEPE P Wage equation

17. END