Chapter 36

Unemployment and Inflation

Economic Cycle

Saudi Inflation Rate

A. W. Phillips(1914 - 1975)

Phillips Curve

Relationshipbetween

Inflation andUnemployment

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."

InflationRate

Unemployment Rate

Phillips Curve

19611963

1962

1964

1965

19661967

1968

InflationRate

Unemployment Rate4% 7%

6%

2%

Phillips Curve

TradeoffHigh Inflation and Low UnemploymentLow Inflation and High Unemployment

Milton Friedman(1912 - 2006)

Is there a long term

relationshipbetween

Inflation andUnemployment?

InflationRate

Unemployment Rate

19611963

1962

1964

1965

19661967

1968

1969 19701971

1972

1973

InflationRate

Unemployment Rate

1968

1969 19701971

1972

1973

No Relationship

Milton Friedman(1912 - 2006)

No Long RunStructural

Relationshipbetween

Inflation andUnemployment

Short-Run

Long-Run

Inflation can reduce unemployment

Inflation and unemployment are unrelated

InflationRate

Unemployment Rate

Phillips -Friedman Curves

Short-Run

Long-Run

No relationshipbecause LRAS is vertical

PriceLevel

Quantity of Output

P1

AD- AS Model

Aggregate Demand

Short RunAggregateSupply

Y1 Y2

P2

Long RunAggregateSupply

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?