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Macroeconomics
Lecture 17
Stabilization
Questions
Policymaking
Active (discretionary)
Responding to change in economy
Passive (non-discretionary)
Following a rule
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
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 and High Unemployment
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
Inflation can reduce
unemployment
Inflation and unemployment
are unrelated
Short-Run
Long-Run
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
Aggregate
Supply
P3
Disinflation
reduction in the rate of
inflation - slows down
Deflation
reduction in the price level
go in reverse
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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Macro 17