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 Phillips curve."

Inflation Rate

Unemployment Rate

Phillips Curve

19611963

1962

1964

1965

19661967

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

19611963

1962

1964

1965

19661967

1968

1969 19701971

1972

1973

Inflation Rate

Unemployment Rate

1968

1969 19701971

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 Aggregate Supply

P3

Natural Rate Hypothesis

The claim that unemployment returns to its normal, or natural rate regardless of the rate of

inflation

Disinflationreduction in the rate of inflation - slows down

Deflationreduction 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 or deflation? !

5. What is disinflation?