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Chapter 35
The Short-Run Tradeoff
between Inflation and
Unemployment
Unemployment and Inflation
• The natural rate of unemployment depends on
various features of the labor market.
• Examples include minimum-wage laws, the
market power of unions, the role of efficiency
wages, and the effectiveness of job search.
• The inflation rate depends primarily on growth in
the quantity of money, controlled by the Fed.
Unemployment and Inflation
• Society faces a short-run tradeoff between
unemployment and inflation.
• If policymakers expand aggregate demand,
they can lower unemployment, but only at the
cost of higher inflation.
• If they contract aggregate demand, they can
lower inflation, but at the cost of temporarily
higher unemployment.
35.1
THE PHILLIPS CURVE
35.1 THE PHILLIPS CURVE
• The Phillips curve illustrates the short-run
relationship between inflation and
unemployment.
35.1.1 Origins of the Phillips Curve
• In 1958,economist A.W.Phillips published an
article in the British journal Economica that would
make him famous. The article was titled “The
Relationship between Unemployment and the Rate
of Change of Money Wages in the United Kingdom,
1861-1957.” In it, Phillips showed a negative
correlation between the rate of unemployment and
the rate of inflation.
• That is, Phillips showed that years with low
unemployment tended to have high inflation, and
years with high unemployment tend to have low
inflation.
35.1.1 Origins of the Phillips Curve
• Although Phillips discovery was based on data for
the United Kingdom, researchers quickly extended
his finding to other countries.
• Two years after Phillips published his article,
economists Paul Samuelson and Robert Solow
published an article in the American Economic
Review called “Analytics of Anti-inflation Policy”
in which they showed a similar negative correlation
between inflation and unemployment in data for the
US.
35.1.1 Origins of the Phillips Curve
• Economists Paul Samuelson and Robert Solow
reasoned that this correlation arose because low
unemployment was associated with high aggregate
demand, which in turn puts upward pressure on
wages and prices throughout the economy. Paul
Samuelson and Robert Solow dubbed the negative
association between inflation and unemployment
the Phillips curve.
• Paul Samuelson and Robert Solow were interested
in the Phillips curve because they believed that it
held important lessons for policymakers.
Figure 1 The Phillips Curve
Inflation
Rate
(percent
per year)
B
6
A
2
Phillips curve
0
4
7
Unemployment
Rate (percent)
35.1.2 Aggregate Demand, Aggregate
Supply, and the Phillips Curve
• The Phillips curve shows the short-run
combinations of unemployment and inflation
that arise as shifts in the aggregate demand
curve move the economy along the short-run
aggregate supply curve.
35.1.2 Aggregate Demand, Aggregate
Supply, and the Phillips Curve
• The greater the aggregate demand for goods
and services, the greater is the economy’s
output, and the higher is the overall price level.
• A higher level of output results in a lower level
of unemployment.
Figure 2 How the Phillips Curve is Related to
Aggregate Demand and Aggregate Supply
(a) The Model of Aggregate Demand and Aggregate Supply
Price
Level
102
Inflation
Rate
(percent
per year)
Short-run
aggregate
supply
6
B
106
B
A
High
aggregate demand
Low aggregate
demand
0
(b) The Phillips Curve
7,500 8,000
(unemployment (unemployment
is 7%)
is 4%)
Quantity
of Output
A
2
Phillips curve
0
4
(output is
8,000)
Unemployment
7
(output is Rate (percent)
7,500)
Notice: AD shifts toward right whilst AS holds constant.
35.1.2 Aggregate Demand, Aggregate Supply,
and the Phillips Curve
• Monetary and fiscal policy can shift the aggregate demand
curve. Therefore monetary and fiscal policy can move the
economy along the Phillips curve.
• Increase in the money supply, increases in
government spending, or cuts in taxes expand
aggregate demand and move the economy to a point
on the Phillips curve with lower unemployment and
higher inflation.
• Decrease in the money supply, cuts in government
spending, or increases in taxes contract aggregate
demand and move the economy to a point on the
Phillips curve with lower inflation and higher
unemployment.
35.2
SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF
EXPECTATIONS
35.2 SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF
EXPECTATIONS
• The Phillips curve seems to offer policymakers
a menu of possible inflation and unemployment
outcomes.
35.2.1 The Long-Run Phillips Curve
• In the 1960s, Milton Friedman and Edmund Phelps
concluded that inflation and unemployment are
unrelated in the long run.
– As a result, the long-run Phillips curve is vertical
at the natural rate of unemployment.
– Monetary policy could be effective in the short
run but not in the long run.
• The vertical long-run Phillips curve illustrates the
conclusion that unemployment does not depend on
money growth and inflation in the long run.
Figure 3 The Long-Run Phillips Curve
Inflation
Rate
1. When the
Fed increases
the growth rate
of the money
supply, the
rate of inflation
increases . . .
High
inflation
Low
inflation
0
Long-run
Phillips curve
B
A
Natural rate of
unemployment
2. . . . but unemployment
remains at its natural rate
in the long run.
Unemployment
Rate
Figure 4 How the Phillips Curve is Related to
Aggregate Demand and Aggregate Supply
(a) The Model of Aggregate Demand and Aggregate Supply
Price
Level
P2
2. . . . raises
the price
P
level . . .
Long-run aggregate
supply
1. An increase in
the money supply
increases aggregate
B
demand . . .
(b) The Phillips Curve
Inflation
Rate
Long-run Phillips
curve
3. . . . and
increases the
inflation rate . . .
B
A
A
AD2
Aggregate
demand, AD
0
Natural rate
of output
Quantity
of Output
0
4. . . . but leaves output and unemployment
at their natural rates.
Natural rate of
unemployment
Unemployment
Rate
35.2.1 The Long-Run Phillips Curve
• The vertical long-run Phillips curve is, in essence,
one expression of the classical idea of monetary
neutrality.
• As figure 4 illustrates, the vertical long-run Phillips
curve and the vertical long-run AS curve are two
sides of the same coin. In panel (a) of this figure, an
increase in the money supply shifts the AD curve to
the right from AD1 to AD2 . As a result of this shift,
the long-run equilibrium moves from point A to
point B. The price level rises from P1 to P2 , but
because the AS curve is vertical, output remains the
same.
35.2.1 The Long-Run Phillips Curve
• In panel (b), more rapid growth in the money supply
raises the inflation rate by moving the economy from
point A to point B. But because the Phillips curve is
vertical, the rate of unemployment is the same at
these two points. Thus, the vertical long-run AS
curve and the vertical long-run Phillips curve both
imply that monetary policy influences nominal
variables (the price level and the inflation rate) but
not real variables (output and unemployment).
• Regardless of the monetary policy pursued by the
Fed, output and unemployment are, in the long run,
at their natural rates.
Appendix: Okun’s law
• Okun’s law states that for every 2 percent that
GDP falls relative to potential GDP, the
unemployment rate rises about 1 percent point.
Okun' s  Law :
y  yf
  ( u  u*),
yf
其中，y  实际产出，y f  潜在产出，u  实际失业率，
u*  潜在失业率，　0    1.
Appendix: Okun’s law
• One important consequence of Okun’s Law is that
actual GDP must grow as rapidly as potential GDP
just to keep the unemployment rate from rising. In
a sense, GDP has to keep running just to keep
unemployment in the same place. Moreover, if you
want to bring the unemployment rate down, actual
GDP must be growing faster than potential GDP.
(Samuelson, Economics, 17th edition, p670.)
35.2.2 Expectations and the Short-Run
Phillips Curve
• Expected inflation measures how much
people expect the overall price level to
change.
35.2.2 Expectations and the Short-Run
Phillips Curve
• In the long run, expected inflation adjusts to
changes in actual inflation.
• The Fed’s ability to create unexpected inflation
exists only in the short run.
– Once people anticipate inflation, the only way
to get unemployment below the natural rate is
for actual inflation to be above the anticipated
rate.
35.2.2 Expectations and the Short-Run
Phillips Curve
(
)
Expected
Unemployment Natural rate of a Actual
=unemployment－ inflation－ inflation
rate
• This equation relates the unemployment rate to
the natural rate of unemployment, actual inflation,
and expected inflation.
Figure 5 How Expected Inflation Shifts the
Short-Run Phillips Curve
Inflation
Rate
2. . . . but in the long run, expected
inflation rises, and the short-run
Phillips curve shifts to the right.
Long-run
Phillips curve
C
B
Short-run Phillips curve
with high expected
inflation
A
1. Expansionary policy moves
the economy up along the
short-run Phillips curve . . .
0
Short-run Phillips curve
with low expected
inflation
Natural rate of
unemployment
Unemployment
Rate
Figure 5: How expected inflation shifts the short-run
Phillips curve
• The higher the expected rate of inflation, the higher
the short-run tradeoff between inflation and
unemployment. At point A, expected inflation and
actual inflation are both low, and unemployment is
at in its natural rate. If the Fed pursues an
expansionary monetary policy. The economy moves
from point A to point B in the short run. At point B,
expected inflation is still low, but actual inflation is
high. Unemployment is below its natural rate. In
the long run, expected inflation rises, and the
economy moves to point C. At point C, expected
inflation and actual inflation are both high, and
unemployment is back to its natural rate.
35.2.3 The Natural Experiment for the
Natural-Rate Hypothesis
• Friedman and Phelps had made a bold prediction in
1968: If policymakers try to take advantage of the
Phillips curve by choosing higher inflation in order
to reduce unemployment, they will succeed at
reducing unemployment only temporarily.
• The view that unemployment eventually returns to
its natural rate, regardless of the rate of inflation, is
called the natural-rate hypothesis.
• Historical observations support the natural-rate
hypothesis.
35.2.3 The Natural Experiment for the
Natural Rate Hypothesis
• The concept of a stable Phillips curve broke
down in the in the early 1970s.
• During the 1970s and 1980s, the economy
experienced high inflation and high
unemployment simultaneously.
35.2.3 The Natural Experiment for the
Natural Rate Hypothesis
• Figure 7 displays the history of inflation and
unemployment from 1961 to 1973. It shows that the simple
negative relationship between these two variables started
to break down around 1970. In particular, as inflation
remained high in the early 1970s, people’s expectations of
inflation caught up with reality, and the unemployment
rate reverted to the 5 percent to 6 percent range that had
prevailed in the early 1960s. Notice that history illustrated
in Figure 7 closely resembles the theory of a shifting shortrun Phillips curve shown in Figure 5. By 1973,
policymakers had learned that Friedman and Phelps were
right: There is no tradeoff between inflation and
unemployment in the long run.
Figure 6 The Phillips Curve in the 1960s
Inflation Rate
(percent per year)
10
8
6
1968
4
1967
2
0
1966
1962
1965
1964
1963
1
2
3
4
5
6
1961
7
8
9
10 Unemployment
Rate (percent)
Figure 7 The Breakdown of the Phillips Curve
Inflation Rate
(percent per year)
10
8
6
1973
1971
1969
1968
4
1970
1972
1967
2
0
1966
1962
1965
1964
1963
1
2
3
4
5
6
1961
7
8
9
10 Unemployment
Rate (percent)
35.3
SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF
SUPPLY SHOCKS
35.3 SHIFTS IN THE PHILLIPS CURVE:
THE ROLE OF SUPPLY SHOCKS
• Historical events have shown that the short-run
Phillips curve can shift due to changes in
expectations.
35.3 SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF SUPPLY
SHOCKS
• The short-run Phillips curve also shifts because of
shocks to aggregate supply总供给冲击.
– Major adverse changes in aggregate supply can
worsen the short-run tradeoff between
unemployment and inflation.
– An adverse supply shock gives policymakers a
less favorable tradeoff between inflation and
unemployment.
35.3 SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF SUPPLY
SHOCKS
• A supply shock is an event that directly alters the
firms’ costs, and, as a result, the prices they
charge.
• This shifts the economy’s aggregate supply
curve. . .
• . . . and as a result, the Phillips curve.
Figure 8 An Adverse Shock to Aggregate Supply
(a) The Model of Aggregate Demand and Aggregate Supply
Price
Level
AS2
P2
3. . . . and
raises
the price
level . . .
B
A
P
Aggregate
supply, AS
(b) The Phillips Curve
Inflation
Rate
1. An adverse
shift in aggregate
supply . . .
4. . . . giving policymakers
a less favorable tradeoff
between unemployment
and inflation.
B
A
PC2
Aggregate
demand
0
Y2
Y
2. . . . lowers output . . .
Quantity
of Output
Phillips curve, P C
0
Unemployment
Rate
35.3 SHIFTS IN THE PHILLIPS
CURVE: THE ROLE OF SUPPLY
SHOCKS
• In the 1970s, policymakers faced two choices
when OPEC cut output and raised worldwide
prices of petroleum.
– Fight the unemployment battle by expanding
aggregate demand and accelerate inflation.
– Fight inflation by contracting aggregate demand
and endure even higher unemployment.
Figure 9 The Supply Shocks of the 1970s
Inflation Rate
(percent per year)
10
1980
1974
8
1981
1975
1979
1978
6
1977
1973
4
1976
1972
2
0
1
2
3
4
5
6
7
8
9
10 Unemployment
Rate (percent)
35.4
THE COST OF REDUCING
INFLATION
35.4 THE COST OF
REDUCING INFLATION
• To reduce inflation, the Fed has to pursue
contractionary monetary policy.
• When the Fed slows the rate of money growth,
it contracts aggregate demand.
• This reduces the quantity of goods and services
that firms produce.
• This leads to a rise in unemployment.
Figure 10 Disinflationary Monetary Policy in the
Short Run and the Long Run
Inflation
Rate
Long-run
Phillips curve
1. Contractionary policy moves
the economy down along the
short-run Phillips curve . . .
A
Short-run Phillips curve
with high expected
inflation
C
B
Short-run Phillips curve
with low expected
inflation
0
Natural rate of
unemployment
Unemployment
2. . . . but in the long run, expected Rate
inflation falls, and the short-run
Phillips curve shifts to the left.
35.4 THE COST OF
REDUCING INFLATION
• To reduce inflation, an economy must endure a
period of high unemployment and low output.
– When the Fed combats inflation, the economy
moves down the short-run Phillips curve.
– The economy experiences lower inflation but
at the cost of higher unemployment.
35.4 THE COST OF
REDUCING INFLATION
• The sacrifice ratio is the number of percentage
points of annual output that is lost in the process
of reducing inflation by one percentage point.
– An estimate of the sacrifice ratio is five.
– To reduce inflation from about 10% in 19791981 to 4% would have required an estimated
sacrifice of 30% of annual output!
Table1. Estimated Average Sacrifice Ratios
Country
Ratio,%
Country
Ratio,%
Australia
1.00
Japan
0.93
Canada
1.50
Switzerland
1.57
France
0.75
United
Kingdom
0.79
Germany
2.92
United States
2.39
Italy
1.74
35.4.2 Rational Expectations and the
Possibility of Costless Disinflation
• Just as Paul Volcker was pondering how costly
reducing inflation might be, a group of economics
professors was leading an intellectual revolution
that would challenge the conventional wisdom on
the sacrifice ratio. This group included such
prominent economists as Robert Lucas, Thomas
Sargent, and Robert Barro.
• The theory of rational expectations suggests that
people optimally use all the information they have,
including information about government policies,
when forecasting the future.
35.4.2 Rational Expectations and the
Possibility of Costless Disinflation
• Expected inflation explains why there is a tradeoff
between inflation and unemployment in the short
run but not in the long run.
• How quickly the short-run tradeoff disappears
depends on how quickly expectations adjust.
• Proponents of rational expectations built on the
Friedman-Phelps analysis to argue that when
economic policies change, people adjust their
expectations of inflation accordingly.
35.4.2 Rational Expectations and the
Possibility of Costless Disinflation
• According to Sargent, the sacrifice ratio could be
much smaller than suggested by previous estimates.
Indeed, in the most extreme case, it could be zero. If
the government made a credible commitment to a
policy of low inflation, people would be rational
enough to lower their expectations of inflation
immediately. The short-run Phillips curve would
shift downward, and the economy would reach low
inflation quickly without the cost of temporarily
high unemployment and low output.
35.4.3 The Volcker Disinflation
• When Paul Volcker was Fed chairman in the
1970s, inflation was widely viewed as one of
the nation’s foremost problems.
• Volcker succeeded in reducing inflation (from
10 percent to 4 percent), but at the cost of high
employment (about 10 percent in 1983).
Figure 11 The Volcker Disinflation
Inflation Rate
(percent per year)
10
1980 1981
A
1979
8
1982
6
1984
4
B
1983
1987
1985
C
1986
2
0
1
2
3
4
5
6
7
8
9
10 Unemployment
Rate (percent)
35.4.4 The Greenspan Era
• Alan Greenspan’s term as Fed chairman
began with a favorable supply shock.
– In 1986, OPEC members abandoned their
agreement to restrict supply.
– This led to falling inflation and falling
unemployment.
Figure 12 The Greenspan Era
Inflation Rate
(percent per year)
10
8
6
1990
1991
1989
1984
1988
1985
1987
2001
1995
1992
2000
1986
1997
1994
1993
1999
2002
1998 1996
4
2
0
1
2
3
4
5
6
7
8
9
10 Unemployment
Rate (percent)
35.4.4 The Greenspan Era
• Fluctuations in inflation and unemployment
in recent years have been relatively small
due to the Fed’s actions.
Summary
• The Phillips curve describes a negative
relationship between inflation and unemployment.
• By expanding aggregate demand, policymakers
can choose a point on the Phillips curve with
higher inflation and lower unemployment.
• By contracting aggregate demand, policymakers
can choose a point on the Phillips curve with
lower inflation and higher unemployment.
Summary
• The tradeoff between inflation and
unemployment described by the Phillips curve
holds only in the short run.
• The long-run Phillips curve is vertical at the
natural rate of unemployment.
Summary
• The short-run Phillips curve also shifts because
of shocks to aggregate supply.
• An adverse supply shock gives policymakers a
less favorable tradeoff between inflation and
unemployment.
Summary
• When the Fed contracts growth in the money
supply to reduce inflation, it moves the economy
along the short-run Phillips curve.
• This results in temporarily high unemployment.
• The cost of disinflation depends on how quickly
expectations of inflation fall.
复习题
1. 画出通货膨胀与失业之间的短期权衡取舍。美联储如
何使经济从这条曲线上的一点移动到另一点？
2. 画出通货膨胀与失业之间的长期权衡取舍。解释短期
与长期权衡取舍如何相互关联。
3. 什么是自然失业率？ 为什么各国的自然失业率不同？
4. 假设干旱摧毁了农作物并使食物价格上升。这对通货
膨胀与失业之间的短期权衡取舍有什么影响？
5. 美联储决定降低通货膨胀。用菲利普斯曲线说明这种
政策的短期与长期影响。如何减少短期的代价？
• (Mankiw, Chapter35 inflation and unemployment, p805,
Question 1.) Suppose the natural rate of unemployment is 6
percent. On one graph, draw two Phillips curves that can be
used to describe the four situations listed here. Label the
point hat shows the position of the economy in each case:
• a. Actual inflation is 5 percent and expected inflation is 3
percent.
• b. Actual inflation is 3 percent and expected inflation is 5
percent.
• c. Actual inflation is 5 percent and expected inflation is 5
percent.
• d. Actual inflation is 3 percent and expected inflation is 3
percent.
Inflation
Rate
5%
3%
A
C
D
Short-run Phillips curve
B with 5% expected
inflation
Short-run Phillips curve
with 3% expected
inflation
Natural rate of
unemployment
unemployment rate
Mankiw,ch35 inflation and unemployment,question1
• (Mankiw, Chapter35 inflation and unemployment, p805, Question 2.)
•
•
•
•
Illustrate the effects of the following developments
on both the short-run and the long-run Phillips
curves. Give the economic reasoning underlying
your answers
a. a rise in the natural rate of unemployment
b. a decline in the price of imported oil
c. a rise in government spending
d. A decline in expected inflation