Chapter 36
!
Unemployment and
Inflation
Economic Cycle
Saudi Inflation Rate
A.W. Phillips	

(1914 - 1975)
Phillips Curve
Relationship	

between	

Inflation and	

Unemployment
Phillips Curve
A curve that shows the
short-run trade-off
between unemployment
and inflation
George Akerlof	

(1940 - )	

Nobel Prize 2001
"Probably the
single most
important
macroeconomic
relationship is
the Philli...
Inflation	

Rate
Unemployment Rate
Phillips Curve
1961
1963
1962
1964
1965
1966
1967
1968
Inflation	

Rate
Unemployment Rate4% 7%
6%
2%
Phillips Curve
Tradeoff	

High Inflation and Low Unemployment	

Low Inflation a...
Milton Friedman	

(1912 - 2006)
Is there a 	

long term	

relationship	

between	

Inflation and	

Unemployment?
Inflation	

Rate
Unemployment Rate
1961
1963
1962
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
Inflation	

Rate
Unemployment Rate
1968
1969
1970
1971
1972
1973
No Relationship
Milton Friedman	

(1912 - 2006)
No 	

Long Run	

Structural	

Relationship	

between	

Inflation and	

Unemployment
Short-Run
!
!
Long-Run
Inflation can reduce
unemployment	

!
Inflation and unemployment
are unrelated	

!
!
Inflation	

Rate
Unemployment Rate
Phillips -Friedman Curves
Short-Run
Long-Run
No relationship	

because LRAS is vertical
Price	

Level
Quantity of Output
P1
AD- AS Model
Aggregate
Demand
Short Run	

Aggregate	

Supply
Y1 Y2
P2
Long Run	

Aggre...
Natural Rate Hypothesis
The claim that
unemployment returns to
its normal, or natural rate
regardless of the rate of
inflat...
Disinflation
reduction in the rate of
inflation - slows down
Deflation
reduction in the price level
go in reverse
Saudi Inflation Rate
Deflation
Disinflation
1.What is the Phillips Curve?	

!
2.What is the Friedman Curve?	

!
3. Can inflation be good?	

!
4.What is worse, inflation...
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Eco 202 ch 36 unemployment and inflation

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Eco 202 ch 36 unemployment and inflation

  1. 1. Chapter 36 ! Unemployment and Inflation
  2. 2. Economic Cycle
  3. 3. Saudi Inflation Rate
  4. 4. A.W. Phillips (1914 - 1975) Phillips Curve Relationship between Inflation and Unemployment
  5. 5. Phillips Curve A curve that shows the short-run trade-off between unemployment and inflation
  6. 6. George Akerlof (1940 - ) Nobel Prize 2001 "Probably the single most important macroeconomic relationship is the Phillips curve."
  7. 7. Inflation Rate Unemployment Rate Phillips Curve 1961 1963 1962 1964 1965 1966 1967 1968
  8. 8. Inflation Rate Unemployment Rate4% 7% 6% 2% Phillips Curve Tradeoff High Inflation and Low Unemployment Low Inflation and High Unemployment
  9. 9. Milton Friedman (1912 - 2006) Is there a long term relationship between Inflation and Unemployment?
  10. 10. Inflation Rate Unemployment Rate 1961 1963 1962 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973
  11. 11. Inflation Rate Unemployment Rate 1968 1969 1970 1971 1972 1973 No Relationship
  12. 12. Milton Friedman (1912 - 2006) No Long Run Structural Relationship between Inflation and Unemployment
  13. 13. Short-Run ! ! Long-Run Inflation can reduce unemployment ! Inflation and unemployment are unrelated ! !
  14. 14. Inflation Rate Unemployment Rate Phillips -Friedman Curves Short-Run Long-Run No relationship because LRAS is vertical
  15. 15. Price Level Quantity of Output P1 AD- AS Model Aggregate Demand Short Run Aggregate Supply Y1 Y2 P2 Long Run Aggregate Supply P3
  16. 16. Natural Rate Hypothesis The claim that unemployment returns to its normal, or natural rate regardless of the rate of inflation
  17. 17. Disinflation reduction in the rate of inflation - slows down Deflation reduction in the price level go in reverse
  18. 18. Saudi Inflation Rate Deflation Disinflation
  19. 19. 1.What is the Phillips Curve? ! 2.What is the Friedman Curve? ! 3. Can inflation be good? ! 4.What is worse, inflation or deflation? ! 5.What is disinflation?

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