2. What we have learned
in macroeconomics
2
Chap 25
Chap 26
Chap 27
Chap 28
Chap 29
Chap 30
The level and growth of productivity and real GDP
How the financial system works and
How the real interest rate adjusts to balance
saving and investment
Why there is always some unemployment
in the economy
The monetary system and how changes in the money
supply affect the price level,the inflation rate, and
the nominal interest rate
Chap 31
Chap 32
Extension of this analysis to open economies to explain
the trade balance and the exchange rate.
GDP
Financial
system
Unemployment
Monetary
system
Open
Economy
Chapter
Key words
Contents
Chap 33
.Discussing some of the important facts about short run
fluctuations in economic activity and introducing a basic
model to explain those fluctuations.
Aggregate demand
and aggregate supply
Chap 34
・How monetary policy influences aggregate demand.
・How fiscal policy influences aggregate demand
Aggregate demand
and aggregate supply
3. The
long
run
determinants
of
unemployment
rate
and
infla7on
3
Unemployment
Inflation
Labor Makers
-minimum wage laws
-the market power of union
-the role of efficiency wages
Monetary Markets
-growth in the money supply
-a nation’s central bank
controls
Largely unrelated problems in the long run
4. Ten Principles of Economics
Ⅰ.How People Make Decisions.
1:People Face Trade-offs.
2:The Cost of Something Is What You Give Up to Get It.
3:Rational People Think at the Margin.
4:People Respond to Incentives.
Ⅱ.How People Interact.
5:Trade Can Make Everyone Better Off.
6:Markets Are Usually a Goodway to Organize Economic Activity.
7:Governments Can Sometimes Improve Market Outcomes.
Ⅲ.How the Economy as a Whole Works
8:A Country's Standard of Living Depends on its Ability to Produce Goods and
Services.
9:Prices Rise When the Government Prints Too Much Money.
10:Society Faces a Short-Run Trade-off between Inflation and Unemployment.
4
6. Origins
of
the
Phillips
Curve
6
p Phillips showed the negative correlation between the rate of unemployment
and the rate of inflation based on date for the United Kingdom through
publishing article in 1958.
p Paul Samuelson and Robert Solow also showed a similar negative
correlation between the rate of unemployment and the rate of inflation in
data for United States.
p According to Samuelson and Solow, policy makers face a trade off between
inflation and unemployment, and the Phillips curve illustrates that trade-off.
Unemployment
rate(%)
Inflation rate
(% year)
4%
7%
6%
2%
7. Aggregate
demand
and
aggregate
supply,
and
the
Phillips
Curve
7
p The Phillips curve shows the combinations of inflation and unemployment
that arise in the short run as shifts in the aggregate-demand curve move
the economy along the short-run aggregate-supply curve.
p Because monetary and fiscal policy can shifts the aggregate demand
curve, they can move an economy along the Phillips curve.
p The Phillips curve offers policymakers a menu of combination of inflation
and unemployment.
Unemployment
rate(%)
Inflation rate
(% year)
Quantity
of output
Price
level
7%
4%
6%
2%
A
B
106
102
Unemployment
Is 7%
Unemployment
Is 4%
The
Phillips
Curve
The
model
of
aggregate
demand
and
aggregate
supply
8. The
Phillips
curve
seems
to
offer
policy
maker
a
menu
of
possible
infla7on
unemployment
outcome.
But
does
this
menu
of
choices
remain
the
same
over7me?
8
9. The
long-‐run
Phillips
curve
9
p According to Friedman and Phelps, there is no trade-off between
inflation and unemployment in the long run.
p Growth in the money supply determines inflation rate. Regardless of
the inflation rate, the unemployment rate gravitates toward its natural
rate. As a result, the long-run Phillips curve is vertical.
Unemployment
rate(%)
Inflation rate
(% year)
Quantity
Of output
Price
level
Natural rate
Of return
B
A
B
A
P2
P1
The
Phillips
Curve
The
model
of
aggregate
demand
and
aggregate
supply
10. How
to
reduce
natural
rate
of
unemployment
• Policy
makers
should
look
to
policies
that
improve
the
func7oning
of
the
labor
market
– Minimum
wage
laws
– Collec7ve
bargaining
laws
– Unemployment
insurance
– Job
training
program
10
11. The
short
run
Phillips
curve
11
Unemployment
rate
=
Natural rat of
Unemployment
a
Actual
inflation
Expected
inflation
In
the
short-‐run
In
the
long-‐run
People
come
to
expect
whatever
infla7on
the
Fed
produces
,
so
actual
infla7on
equals
expected
infla7on
,
and
unemployment
is
at
its
natural
rate.
Expected
infla7on
is
given,
so
higher
actual
infla7on
rate
is
associated
with
lower
unemployment
rate
-
-
12. The
natural
experiment
for
the
Natural-‐rate
hypothesis
12
Unemployment
rate(%)
Inflation rate
(% year)
p Friedman and Phelps had made a bold prediction in
1968.
p If policy maker try to take advantage of the Phillips curve
by choosing higher inflation to reduce unemployment,
they will succeed at reducing unemployment only
temporarily.
Natural rate of
unemployment
B
A
C
The
long
run
Phillips
Curve
13. [case]data
from
1961
to
1968
The
Phillips
curve
in
the
1960s
13
p This figure uses annual data from 1961 to 1968 on
the employment rate and on the inflation to show
the negative relationship between inflation and
unemployment.
14. [case]data
from
1961
to
1973
The
break
down
of
the
Phillips
curve
14
p The Phillips curve of the 1960s breaks down in the early 1970s, just
as Friedman and Phelps had predicted.
p Notice that the points labeled A, B, and C in this figure correspond
roughly to the points in figure of page 12.
15. Shi[
in
the
Phillips
curve
The
role
of
supply
shock
15
Quantity
Of output
Price
level
Unemployment
rate(%)
Inflation rate
(% year)
B
A
P2
P1
B
A
AS1
AS2
p In 1974, OPEC began to exert its market power as a cartel in the world oil market to increase its
member’s profits.
p A large increase in the world price of oil is an example of oil is an example of a supply shock. A
supply shock is an event that directly affects firm’s costs of production and thus the prices they
charge; it shifts the economy’s aggregate supply curve and, as a result the Phillips curve.
p Confronted with such an adverse shifts in the Phillips curve, policy makers face a difficult choice
between fighting inflation and unemployment further.
p Faced with such an adverse shifts in the Phillips curve, policy makers will ask whether the shift is
temporary or permanent. The answer depends on how people adjust their expectations of inflation.
Y1
Y2
The
Phillips
Curve
The
model
of
aggregate
demand
and
aggregate
supply
16. [case]
data
from
1972
to
1981
the
period
1973-‐1975
and
1978-‐1981
The
supply
shock
of
the
1970s
16
p In the period 1973-1975 and 1978-1981, increases in
world oil prices led to higher inflation and higher
unemployment.
17. Disinfla7onary
monetary
policy
in
the
short
run
and
long
run
17
Unemployment
rate(%)
Inflation rate
(% year)
Long
run
Phillips
Curve
A
C
B
Natural rate of
Unemployment
Short
run
Phillips
curve
with
high
expected
infla7on.
Short
run
Phillips
curve
with
low
expected
infla7on.
p If a nation wants to reduce inflation, it must endure a period of high unemployment
and low input.
p When the Fed pursues contractionary monetary policy to reduce inflation, the
economy moves along a short run Phillips curve from point A to B.
p Over time ,expected inflation falls, and the short run Phillips curve shifts downward.
p When the economy reaches point C, unemployment is back at its natural rate.
18. Sacrifice
ra7o
• The
sacrifice
ra7o
is
the
number
of
percentage
points
if
annual
output
lost
in
the
process
of
reducing
infla7on
by
1%
point.
• A
typical
es7mate
of
sacrifice
ra7o
is
5.
18
19. [case]from
1979
to
1987
The
Volcker
disinfla7on
19
p The reduction in inflation during this period came at the
cost of very high unemployment in 1982 and 1983.
p Note that the points labeled A, B, and C in this figure
correspond roughly to the the points in page 17.
20. [case]
data
from
1984
to
2005
The
Greenspan
Era
20
p During most of this period, Alan Greenspan was
chairman of the Federal Reserve.
p Fluctuations in inflation and unemployment were
relatively small.
21. [case]data
from
2006
to
2009
The
Phillips
curve
during
the
financial
crisis
21
p A financial crisis caused aggregate demand to
plummet, leading to much higher unemployment and
pushing inflation down to a very low level.
