TAILIEUCHUNG - Lecture Principles of economics - Chapter 35: The short-run tradeoff between inflation and unemployment

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. | 35 The Short-Run Tradeoff between Inflation and Unemployment 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. Unemployment and Inflation 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. Figure 1 The Phillips Curve Unemployment Rate (percent) 0 Inflation Rate (percent per year) Phillips curve 4 B 6 7 A 2 Copyright © 2004 South-Western Aggregate .

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