TradeoffbetweenInflationandUnemployment.pdfVIP

The Short-Run Tradeoff between Inflation and Unemployment Chapter 33 Copyright ? 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Unemployment and Inflation u The natural rate of unemployment depends on various features of the labor market. u Examples include minimum-wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Unemployment and Inflation u The inflation rate depends primarily on growth in the quantity of money, controlled by the Fed. u The misery index, one measure of the “health” of the economy, adds together the inflation rate and unemployment rate. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. 1 Unemployment and Inflation u Society faces a short-run tradeoff between unemployment and inflation. u If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. u If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. The Phillips Curve The Phillips curve illustrates the short-run relationship between inflation and unemployment. Harcourt, Inc. items and de