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In this chapter we examine this tradeoff more closely. The relationship between inflation and unemployment is a topic that has attracted the attention of some of the most important economists of the last half century. The best way to understand this relationship is to see how thinking about it has evolved over time. | Review of the previous lecture The natural rate of unemployment the long-run average or “steady state” rate of unemployment depends on the rates of job separation and job finding Frictional unemployment due to the time it takes to match workers with jobs may be increased by unemployment insurance Structural unemployment results from wage rigidity - the real wage remains above the equilibrium level causes: minimum wage, unions, efficiency wages Review of the previous lecture Duration of unemployment most spells are short term but most weeks of unemployment are attributable to a small number of long-term unemployed persons Lecture 18 Unemployment and Inflation Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline Unemployment and inflation Phillips curve The cost of reducing inflation Unemployment and Inflation The natural rate of unemployment depends on various features of the labor market. Examples include minimum-wage laws, the market power of unions, the role of . | Review of the previous lecture The natural rate of unemployment the long-run average or “steady state” rate of unemployment depends on the rates of job separation and job finding Frictional unemployment due to the time it takes to match workers with jobs may be increased by unemployment insurance Structural unemployment results from wage rigidity - the real wage remains above the equilibrium level causes: minimum wage, unions, efficiency wages Review of the previous lecture Duration of unemployment most spells are short term but most weeks of unemployment are attributable to a small number of long-term unemployed persons Lecture 18 Unemployment and Inflation Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline Unemployment and inflation Phillips curve The cost of reducing inflation Unemployment and Inflation The natural rate of unemployment depends on various features of the labor market. Examples include minimum-wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search. The inflation rate depends primarily on growth in the quantity of money, controlled by the Fed. Society faces a short-run tradeoff between unemployment and inflation. If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment The Phillips Curve The Phillips curve illustrates the short-run relationship between inflation and unemployment. The Phillips Curve Aggregate Demand, Aggregate Supply, and the Phillips Curve The Phillips curve shows the short-run combinations of unemployment and inflation that arise as shifts in the aggregate demand curve move the economy along the short-run aggregate supply curve. The greater the aggregate demand for goods and services, the greater is the economy’s output, and the higher is the overall price level. A higher level of output results in
