1. Copyright © 2004 South-Western 35 The Short-Run Tradeoff between Inflation and Unemployment Valið milli verðbólgu og atvinnuleysis

2. Copyright © 2004 South-Western THE PHILLIPS CURVE The Phillips curve illustrates the short-run relationship between inflation and unemployment. Phillips kúrfan sýnir skammtíma samband verðbólgu og atvinnuleysis. Atvinnuleysi minnkar þegar verðbólga eykst og öfugt - þ.e. þegar samdráttur er í efnahagslífinu og verðbólga minnkar, þá eykst atvinnuleysi.

3. Figure 1 The Phillips Curve Unemployment Rate (percent) 0 Inflation Rate (percent per year) Phillips curve 4 B 6 7 A 2 Copyright © 2004 South-Western

4. The Long-Run Phillips Curve In the 1960s, Friedman and Phelps concluded that inflation and unemployment are unrelated in the long run. Til lengri tíma eru engin tengsl milli verðbólgju og atvinnuleysis. As a result, the long-run Phillips curve is vertical at the natural rate of unemployment.

5. Figure 3 The Long-Run Phillips Curve Unemployment Rate 0Natural rate of unemployment Inflation Rate Long-run Phillips curve B High inflation Low inflation A 2.... but unemployment remains at its natural rate in the long run. 1. When the Fed increases the growth rate of the money supply, the rate of inflation increases... Copyright © 2004 South-Western

6. Figure 5 How Expected Inflation Shifts the Short- Run Phillips Curve Unemployment Rate 0Natural rate of unemployment Inflation Rate Long-run Phillips curve Short-run Phillips curve with high expected inflation Short-run Phillips curve with low expected inflation 1. Expansionary policy moves the economy up along the short-run Phillips curve... 2.... but in the long run, expected inflation rises, and the short-run Phillips curve shifts to the right. C B A Copyright © 2004 South-Western