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1、In this chapter,look for the answers to these questions:How are inflation and unemployment related in the short run?In the long run?What factors alter this relationship?What is the short-run cost of reducing inflation?Why were U.S.inflation and unemployment both so low in the 1990s?1第1页/共37页2Introdu
2、ctionIn the long run,inflation&unemployment are unrelated:The inflation rate depends mainly on growth in the money supply.Unemployment(the“natural rate”)depends on the minimum wage,the market power of unions,efficiency wages,and the process of job search.One of the Ten Principles:In the short run,so
3、ciety faces a trade-off between inflation and unemployment.第2页/共37页3(1)The Phillips Curve第3页/共37页4The Phillips CurvePhillips curve:shows the short-run trade-off between inflation and unemployment 1958:A.W.Phillips showed that nominal wage growth was negatively correlated with unemployment in the U.K
4、.1960:Paul Samuelson&Robert Solow found a negative correlation between U.S.inflation&unemployment,named it“the Phillips Curve.”第4页/共37页5Deriving the Phillips CurveSuppose P=100 this year.The following graphs show two possible outcomes for next year:A.Aggregate demand low,small increase in P(i.e.,low
5、 inflation),low output,high unemployment.B.Aggregate demand high,big increase in P(i.e.,high inflation),high output,low unemployment.第5页/共37页6Deriving the Phillips Curveu-rateinflationPCA.Low aggregate demand,low inflation,high u-rateB.High aggregate demand,high inflation,low u-rateYPSRASAD1AD2Y1103
6、A105Y2B6%3%A4%5%B第6页/共37页7The Phillips Curve:A Policy Menu?Since fiscal and monetary policy affect aggregate demand,the Phillips curve(PC)appeared to offer policymakers a menu of choices:low unemployment with high inflationlow inflation with high unemploymentanything in between1960s:U.S.data support
7、ed the Phillips curve.Many believed the PC was stable&reliable.第7页/共37页8Evidence for the Phillips Curve?Inflation rate(%per year)Unemployment rate(%)During the 1960s,U.S.policymakers opted for reducing unemployment at the expense of higher inflation196163656264666768第8页/共37页9(2)Shifts in Phillips Cu
8、rve:Role of Expectations第9页/共37页10(A)The Vertical Long-Run Phillips Curve1968:Milton Friedman and Edmund Phelps argued that the tradeoff was temporary.Natural-rate hypothesis:the claim that unemployment eventually returns to its normal or“natural”rate,regardless of the inflation rateBased on the cla
9、ssical dichotomy and the vertical LRAS curve第10页/共37页The Vertical Long-Run Phillips Curveu-rateinflationIn the long run,faster money growth only causes faster inflation.YPLRASAD1AD2Natural rate of outputNatural rate of unemploymentP1P2LRPClow infla-tionhigh infla-tion11第11页/共37页12(B)Reconciling Theo
10、ry and EvidenceEvidence(from 60s):PC slopes downward.Theory(Friedman and Phelps):PC is vertical in the long run.To bridge the gap between theory and evidence,Friedman and Phelps introduced a new variable:expected inflation a measure of how much people expect the price level to change.第12页/共37页13(C)T
11、he Phillips Curve EquationShort run The Central Bank can reduce u-rate below the natural u-rate by making inflation greater than expected.(Note that b 0.)Long run Expectations catch up to reality(when expected inflation=actual inflation),u-rate goes back to natural u-rate whether inflation is high o
12、r low.Unemp.rateNatural rate of unemp.=bActual inflationExpected inflation 第13页/共37页14(D)How Expected Inflation Shifts the PCInitially,expected&actual inflation=3%,unemployment=natural rate(6%).Central Bank makes inflation 2%higher than expected,u-rate falls to 4%.In the long run,expected inflation
13、increases to 5%,PC shifts upward,unemployment returns to its natural rate.u-rateinflationPC1LRPC6%3%PC24%5%ABC第14页/共37页Natural rate of unemployment=5%Expected inflation=2%In PC equation,b=0.5A.Plot the long-run Phillips curve.B.Find the u-rate for each of these values of actual inflation:0%,6%.Sketc
14、h the short-run PC.C.Suppose expected inflation rises to 4%.Repeat part B.D.Instead,suppose the natural rate falls to 4%.Draw the new long-run Phillips curve,then repeat part B.A C T I V E L E A R N I N G A C T I V E L E A R N I N G 1 1 A numerical example15第15页/共37页A C T I V E L E A R N I N G A C T
15、 I V E L E A R N I N G 1 1 Answers16LRPCAAn increase in expected inflation shifts PC to the right.PCDLRPCDPCBPCCA fall in the natural rate shifts both curves to the left.第16页/共37页17(E)The Breakdown of the Phillips CurveInflation rate(%per year)Unemployment rate(%)Early 1970s:unemployment increased,d
16、espite higher inflation.Friedman&Phelps explanation:expectations were catching up with reality.1961636562646667686970717273第17页/共37页18(3)Shifts in Phillips Curve:Role of Supply Shocks第18页/共37页19Another PC Shifter:Supply ShocksSupply shock:an event that directly alters firms costs and prices,shifting
17、 the AS and PC curves Example:large increase in oil prices 第19页/共37页20How an Adverse Supply Shock Shifts the PCu-rateinflationSRAS shifts left,prices rise,output&employment fall.Inflation&u-rate both increase as the PC shifts upward.YPSRAS1ADPC1PC2ABSRAS2AY1P1Y2BP2第20页/共37页21The 1970s Oil Price Shoc
18、ksThe Fed(U.S.Central Bank)chose to accommodate the first shock in 1973 with faster money growth.Result:Higher expected inflation,which further shifted PC.1979:Oil prices surged again,worsening the Feds tradeoff.38.001/198132.501/198014.851/197910.111/1974$3.561/1973Oil price per barrel第21页/共37页22Th
19、e 1970s Oil Price ShocksInflation rate(%per year)Unemployment rate(%)Supply shocks&rising expected inflation worsened the PC tradeoff.1972737475767778798081第22页/共37页23(4)The Cost of Reducing Inflation第23页/共37页24The Cost of Reducing InflationDisinflation:a reduction in the inflation rate To reduce in
20、flation,the Fed(U.S.Central Bank)must slow the rate of money growth,which reduces aggregate demand.Short run:Output falls and unemployment rises.Long run:Output&unemployment return to their natural rates.第24页/共37页25(A)Disinflationary Monetary PolicyContractionary monetary policy moves economy from A
21、 to B.Over time,expected inflation falls,PC shifts downward.In the long run,point C:the natural rate of unemployment,&lower inflation.u-rateinflationLRPCPC1natural rate of unemploymentAPC2CB第25页/共37页26(B)Sacrifice RatioDisinflation requires enduring a period of high unemployment and low output.Sacri
22、fice ratio:percentage points of annual output lost(over the years)per 1 percentage point reduction in inflationTypical estimate of the sacrifice ratio:5To reduce inflation rate 1%,must sacrifice 5%of a years output.Can spread cost over time,e.g.To reduce inflation by 6%,can eithersacrifice 30%of GDP
23、 for one yearsacrifice 10%of GDP for three years第26页/共37页27(C)Rational Expectations,Costless Disinflation?Rational expectations:a theory according to which people optimally use all the information they have,including information about government policies,when forecasting the future Early proponents:
24、Robert Lucas,Thomas Sargent,Robert BarroImplied that disinflation could be much less costly第27页/共37页28Rational Expectations,Costless Disinflation?Suppose the Central Bank convinces everyone it is committed to reducing inflation.Then,expected inflation falls,the short-run PC shifts downward quickly.R
25、esult:Disinflations can cause less unemployment than the traditional sacrifice ratio predicts.In the extreme case,it could be close to zero,when people adjust inflation expectation immediately.第28页/共37页29(D)The Volcker DisinflationFed Chairman Paul VolckerAppointed in late 1979 under high inflation&
26、unemploymentChanged Fed policy to disinflation1981-1984:Fiscal policy was expansionary,so Fed policy had to be very contractionary to reduce inflation.Success:Inflation fell from 10%to 4%,but at the cost of high unemployment第29页/共37页30The Volcker DisinflationInflation rate(%per year)Unemployment rat
27、e(%)Disinflation turned out to be very costlyu-rate near 10%in 1982-8319798081828384858687第30页/共37页31(E)The Greenspan Era1986:Oil prices fell 50%.1989-90:Unemployment fell,inflation rose.Fed raised interest rates,caused a mild recession.1990s:Unemployment and inflation fell.2001:Negative demand shoc
28、ks created the first recession in a decade.Policymakers responded with expansionary monetary and fiscal policy.Alan Greenspan Chair of FOMC,Aug 1987 Jan 2006第31页/共37页32The Greenspan EraInflation rate(%per year)Unemployment rate(%)Inflation and unemployment were low during most of Alan Greenspans yea
29、rs as Fed Chairman.198790922000949698060205第32页/共37页33(F)Ben Bernankes challengesAggregate demand shocks:Subprime mortgage crisis,falling housing prices,widespread foreclosures,financial sector troubles.Aggregate supply shocks:Rising prices of food/agricultural commodities,e.g.,Corn per bushel:$2.10
30、 in 2005-06,$5.76 in 5/2008Rising oil pricesOil per barrel:$35 in 2/2004,$134 in 6/2008From 6/2007 to 6/2008,unemployment rose from 4.6%to 5.5%CPI inflation rose from 2.6%to 4.9%第33页/共37页34CONCLUSIONThe theories in this chapter come from some of the greatest economists of the 20th century.They teach
31、 us that inflation and unemployment areunrelated in the long runnegatively related in the short runaffected by expectations,which play an important role in the economys adjustment from the short-run to the long run.第34页/共37页CHAPTER SUMMARYThe Phillips curve describes the short-run tradeoff between i
32、nflation and unemployment.In the long run,there is no tradeoff:inflation is determined by money growth,while unemployment equals its natural rate.Supply shocks and changes in expected inflation shift the short-run Phillips curve,making the tradeoff more or less favorable.35第35页/共37页CHAPTER SUMMARYTh
33、e Central Bank can reduce inflation by contracting the money supply,which moves the economy along its short-run Phillips curve and raises unemployment.In the long run,though,expectations adjust and unemployment returns to its natural rate.Some economists argue that a credible commitment to reducing inflation can lower the costs of disinflation by inducing a rapid adjustment of expectations.36第36页/共37页 ECON1002C/D(2011)Ch 22:SHORT-RUN INF.&U-RATE TRADE-OFF37感谢您的欣赏！第37页/共37页