1. Inflation and Unemployment: The Phillips Curve
Can Governments Lower Unemployment at No Cost?

2. The Short-Run Phillips Curve
Inflation rate
When the unemployment rate is low, inflation is high
When the unemployment rate is high, inflation is low
Short-run Phillips curve,
SRPC
Unemployment rate

3. The Short-Run Phillips Curve and Supply Shocks
Inflation rate
A negative supply shock shifts SRPC up
SRPC1
A positive supply shock shifts SRPC down
SRPC0
SRPC2
Unemployment rate

4. Expected Inflation and the Short-run Phillips Curve
Inflation rate
SRPC shifts up by the amount of the increase in expected inflation
10% 9% 8% 7% 6% 5% 4% 3% 2% 1%
-1% 1 2 3 4 5 6 7 8 9 10
SRPC3
-2%
-3%
-4%
SRPC0
-5%
-6%
Unemployment rate

5. The NAIRU and the Long-Run Phillips Curve
Long-run Phillips curve, LRPC
Suppose the government attempts to push unemployment down, at the cost of higher inflation. What will happen?
Inflation rate
10% 9% 8% 7% C
What happens if the government continues on this course (trying to force down unemployment with higher inflation)? 6% 5% B E4 4% 3% A E2 2% 1% E0
-1% 1 2 3 4 5 6 7 8 9 10
-2%
Nonaccelerating inflation rate of unemployment, NAIRU
SRPC4
-3%
-4%
SRPC2
-5%
-6%
SRPC0
Unemployment rate

6. Phillips Curve Questions
Draw a graph AND EXPLAIN what would happen to SRPC in the following scenarios:
Government increases spending
The price of crude oil and most energy sources increase
Inflation expectations rise from 3% to 6%
The Fed increases interest rates with contractionary monetary policy
Inflation expectations fall from 5% to 2%
The government increases income taxes
What happens in the LONG RUN in Question #1?