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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?