1. IB Economics (HL) Ch 21 The relationship between unemployment and inflation

2. RECAP: Macro economic objectives Price stability Sustainable economic growth Full employment Satisfactory balance of payments (Satisfactory distribution of income) inflationunemployment  The PC illustrates the relationship between inflation and unemployment

3. Background to the PC Developed by AW Phillips in 1958 –Working at LSE –Inverse relationship between wage level changes and unemployment –Data set used: UK 1861 to 1913 –Adapted to other countries by economists to model inflation and unemployment

4. The Phillips Curve(s) Rate of change of wages Rate of inflation Unemployment rate The ‘original’ Phillips CurveThe Phillips Curve

5. CLASS TASK: How does the PC relate to AS/AD?

6. 75 74 80 76 77 79 71 73 70 72 78 90 89 97 96 91 88 95 82 83 84 85 86 93 87 92 94 81 Inflation (%) Unemployment (%) The breakdown of the Phillips curve? 69 68 67 63 62 65 66 64 60 61 99 98 00 01 03 02 Source: Modified from SLOMAN

7. The LR Phillips Curve Milton Friedman MonetaristsThe PC was criticised by Milton Friedman and other Monetarists Neo-Classical THINK WHY?PC also inconsistent with Neo-Classical economic ideas THINK WHY? Expectations Augmented Phillips CurveThe LR PC or Expectations Augmented Phillips Curve model was developed in light of the breakdown of the data/theory link

8. The Expectations Augmented Phillips Curve SRPC 1 KEY TERMS to remember SRPC LRPC Natural Rate of Unemployment Money Illusion ‘Sticky’ Downwards

9. Natural Rate of Unemployment NRU NAIRU Determinants of the NRU/NAIRU Use of supply side polices EVALUATIVE QUESTIONS: 1)Consider whether you would expect the NAIRU to be higher under a Labour government or a Conservative government? 1)Examine whether policies aimed at reducing the NAIRU will be successful.

10. LR Phillips Curve and SSPs

11. Further Reading Sloman pages 325 to 335 –There is a great section on page 331 which gives a Keynesian rebuttal to the LRPC analysis Suggested Sloman Web Cases –9.7: AW Phillips –9.9: Milton Friedman –9.8: Explaining the shape of the SRPC –9.21: Different schools of economic thought