Inflation and Unemployment The Phillips Curve Module 34.
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Inflation and Unemployment The Phillips Curve Module 34
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Inflation and Unemployment In times of hyperinflation ◦ ppl hold less money ◦ Causes more shortages ◦ Less money transactions Gov’t turns to seigniorage, prints more, leading to more issues Who pays for inflation ◦ People who currently hold money – inflation tax
Transcript of Inflation and Unemployment The Phillips Curve Module 34.
Inflation and UnemploymentThe Phillips CurveModule 34
Inflation and UnemploymentInflation problems
◦Inflation Tax Because we use fiat money, gov’t can
print money to pay of debts (seigniorage) Ex – US gov’t debt purchased by the Fed
Inflation and UnemploymentIn times of hyperinflation
◦ppl hold less money◦Causes more shortages◦Less money transactions
Gov’t turns to seigniorage, prints more, leading to more issues
Who pays for inflation◦People who currently hold money –
inflation tax
Inflation and UnemploymentCost-Push inflation
◦Caused by dramatic spike in price of input/commodity 1970s oil crisis
Demand-Pull inflation◦Inflation caused by increase in AD
“Too much money chasing too few goods”
The Short Run Phillips CurveNegative relationship btw
inflation rates and unemploymentFactors: supply shocks, expected
inflation (1960s)Used often in 50s and 60s to help
determine economic policyInitially, some people believed
accepting high inflation = low unemployment
Where the Phillips Curve fails: https://www.youtube.com/watch?v=qQjAbHR40nk
Still the Phillips CurveLong-Run Phillips Curve (LRPC)
◦Policy makers have two choices: unemployment or inflation? Not so much
Natural Rate of UnemploymentNatural Rate Hypothesis
◦Reminder: Natural Rate = Structural + Frictional
◦Unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation If unemployment BELOW natural rate, inflation
ever accelerates Rate ABOVE natural rate, decelerating inflation
◦NAIRU (Non-Accelerating Rate of Unemployment)
Long-Run Phillips CurveRelationship between
unemployment and inflation in LR◦After expectations of inflation have
had time to adjust◦Normal Human Terms: it is vertical,
the LRPC shows limits to expansionary policies
◦Any rate ABOVE, leads to decelerating inflation
Inflation and UnemploymentDisinflation and Deflation
◦Disinflation – process of bringing down inflation that has become embedded in expectations
◦Deflation – fall in the overall level of prices
◦Monetary Shortcomings Zero Bound Liquidity Trap
Zero Bound causes Liquid Trap
