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3535The Short-Run Tradeoff between Inflation and

Unemployment Valið milli verðbólgu og

atvinnuleysis

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THE PHILLIPS CURVE

• The Phillips curve illustrates the short-run relationship between inflation and unemployment. Phillips kúrfan sýnir skammtíma samband verðbólgu og atvinnuleysis. Atvinnuleysi minnkar þegar verðbólga eykst og öfugt - þ.e. þegar samdráttur er í efnahagslífinu og verðbólga minnkar, þá eykst atvinnuleysi.

Figure 1 The Phillips Curve

UnemploymentRate (percent)

0

InflationRate

(percentper year)

Phillips curve

4

B6

7

A2

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The Long-Run Phillips Curve

• In the 1960s, Friedman and Phelps concluded that inflation and unemployment are unrelated in the long run. Til lengri tíma eru engin tengsl milli verðbólgju og atvinnuleysis.• As a result, the long-run Phillips curve is vertical at

the natural rate of unemployment.

Figure 3 The Long-Run Phillips Curve

UnemploymentRate

0 Natural rate ofunemployment

InflationRate Long-run

Phillips curve

BHighinflation

Lowinflation

A

2. . . . but unemploymentremains at its natural ratein the long run.

1. When the Fed increases the growth rate of the money supply, the rate of inflation increases . . .

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Figure 5 How Expected Inflation Shifts the Short-Run Phillips Curve

UnemploymentRate

0 Natural rate ofunemployment

InflationRate Long-run

Phillips curve

Short-run Phillips curvewith high expected

inflation

Short-run Phillips curvewith low expected

inflation

1. Expansionary policy movesthe economy up along the short-run Phillips curve . . .

2. . . . but in the long run, expectedinflation rises, and the short-run Phillips curve shifts to the right.

CB

A

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