Module 34 Inflation and Unemployment The Phillips Curve

Module 34 Inflation and Unemployment: The Phillips Curve KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: • What the Phillips curve is and the nature of the short-run trade-off between inflation and unemployment • Why there is no long-run trade-off between inflation and unemployment • Why expansionary policies are limited due to the effects of expected inflation • Why even moderate levels of inflation can be hard to end • Why deflation is a problem for economic policy and leads policy makers to prefer a low but positive inflation rate

The Short-Run Phillips Curve • The role of supply shocks • Friedman and Phelps

Inflation Expectations and the Short-Run Phillips Curve • Expected Inflation • Relationship between actual and expected inflation • What determines expected inflation? • Why was expected inflation not included initially?

Inflation and Unemployment in the Long Run • The SRPC of the 1960 s • The experience of the 1970 s • The trade-off between inflation and unemployment

The Long-Run Phillips Curve • The short run and long run effects of expansionary policies

The Long-Run Phillips Curve • NAIRU • LRPC • Natural Rate Hypothesis • Natural Rate = NAIRU

The Costs of Disinflation

Deflation • Debt Deflation • Effects of Expected Deflation • Zero Bound • Liquidity Trap