1.  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

2. Unemployment Rate (Percent) Annual Rate of Inflation (Percent) Unemployment Rate (Percent) 69 68 67 66 65 64 63 61 Concept Empirical Data Data for the 1960s 62 2©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

3. Real Domestic Output Price Level 0 P0P0 P1P1 P2P2 P3P3 Q0Q0 Q1Q1 Q2Q2 Q3Q3 AD 0 AD 1 AD 2 AD 3 AS LO3 18-3 3©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

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

5.  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. 6©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3

7.  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

8. 15 10 5 1999 2001 200320052007 2009 Source: Bureau of Labor Statistics,stats.bls.gov LO4 18-8 8©2013 McGraw-Hill Ryerson Ltd. Chapter 15, LO3