Principles of Macroeconomics :3

1. 35 The Short-Run Tradeoff between Inflation and Unemployment

5. Figure 1 The Phillips Curve Unemployment Rate (percent) 0 Inflation Rate (percent per year) Copyright © 2004 South-Western Phillips curve 4 B 6 7 A 2

8. Figure 2 How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply Quantity of Output 0 (a) The Model of Aggregate Demand and Aggregate Supply Unemployment Rate (percent) 0 Inflation Rate (percent per year) Price Level (b) The Phillips Curve Copyright © 2004 South-Western Short-run aggregate supply Phillips curve Low aggregate demand High aggregate demand (output is 8,000) B 4 6 (output is 7,500) A 7 2 8,000 (unemployment is 4%) 106 B (unemployment is 7%) 7,500 102 A

11. Figure 3 The Long-Run Phillips Curve Unemployment Rate 0 Natural rate of unemployment Inflation Rate Long-run Phillips curve Copyright © 2004 South-Western B High inflation Low inflation A 2. . . . but unemployment remains at its natural rate in the long run. 1. When the Fed increases the growth rate of the money supply, the rate of inflation increases . . .

12. Figure 4 How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply Quantity of Output Natural rate of output Natural rate of unemployment 0 Price Level Long-run aggregate supply Long-run Phillips curve (a) The Model of Aggregate Demand and Aggregate Supply Unemployment Rate 0 Inflation Rate (b) The Phillips Curve Copyright © 2004 South-Western P Aggregate demand, AD 2. . . . raises the price level . . . 1. An increase in the money supply increases aggregate demand . . . A AD 2 B A 4. . . . but leaves output and unemployment at their natural rates. 3. . . . and increases the inflation rate . . . P 2 B

16. Figure 5 How Expected Inflation Shifts the Short-Run Phillips Curve Unemployment Rate 0 Natural rate of unemployment Inflation Rate Long-run Phillips curve Copyright © 2004 South-Western Short-run Phillips curve with high expected inflation Short-run Phillips curve with low expected inflation 1. Expansionary policy moves the economy up along the short-run Phillips curve . . . 2. . . . but in the long run, expected inflation rises, and the short-run Phillips curve shifts to the right. C B A

19. Figure 6 The Phillips Curve in the 1960s 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 Unemployment Rate (percent) Inflation Rate (percent per year) Copyright © 2004 South-Western 1968 1966 1961 1962 1963 1967 1965 1964

20. Figure 7 The Breakdown of the Phillips Curve 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 Unemployment Rate (percent) Inflation Rate (percent per year) Copyright © 2004 South-Western 1973 1966 1972 1971 1961 1962 1963 1967 1968 1969 1970 1965 1964

24. Figure 8 An Adverse Shock to Aggregate Supply Quantity of Output 0 Price Level Aggregate demand (a) The Model of Aggregate Demand and Aggregate Supply Unemployment Rate 0 Inflation Rate (b) The Phillips Curve Aggregate supply, AS Phillips curve, P C Copyright © 2004 South-Western 3. . . . and raises the price level . . . AS 2 A 1. An adverse shift in aggregate supply . . . 4. . . . giving policymakers a less favorable tradeoff between unemployment and inflation. B P 2 Y 2 P A Y 2. . . . lowers output . . . PC 2 B

26. Figure 9 The Supply Shocks of the 1970s 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 Unemployment Rate (percent) Inflation Rate (percent per year) Copyright © 2004 South-Western 1972 1975 1981 1976 1978 1979 1980 1973 1974 1977

28. Figure 10 Disinflationary Monetary Policy in the Short Run and the Long Run Unemployment Rate 0 Natural rate of unemployment Inflation Rate Long-run Phillips curve Copyright © 2004 South-Western Short-run Phillips curve with high expected inflation Short-run Phillips curve with low expected inflation 1. Contractionary policy moves the economy down along the short-run Phillips curve . . . 2. . . . but in the long run, expected inflation falls, and the short-run Phillips curve shifts to the left. B C A

35. Figure 11 The Volcker Disinflation 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 Unemployment Rate (percent) Inflation Rate (percent per year) Copyright © 2004 South-Western 1980 1981 1982 1984 1986 1985 1979 A 1983 B 1987 C

37. Figure 12 The Greenspan Era 1 2 3 4 5 6 7 8 9 10 0 2 4 6 8 10 Unemployment Rate (percent) Inflation Rate (percent per year) Copyright © 2004 South-Western 1984 1991 1985 1992 1986 1993 1994 1988 1987 1995 1996 2002 1998 1999 2000 2001 1989 1990 1997