Lecture 6: Inflation and Unemployment

Unemployment due to the normal fluctuations in the economy, also known as cyclical unemployment.

Unemployment caused by a mismatch between the skills of job seekers and the skills required by available jobs.

Unemployment caused by wages being artificially high, preventing the labor market from reaching equilibrium.

Unemployment caused by individuals choosing not to work, either by personal preference or due to waiting for better job opportunities.

Unemployment that occurs seasonally, often due to weather conditions or industry-specific patterns.

Unemployment caused by a decrease in overall demand for goods and services in the economy.

Inflation that occurs when the overall demand in the economy increases, leading to rising prices.

Inflation that occurs when the cost of production increases, leading to higher prices for goods and services.

A sustained increase in the general price level of goods and services.

A decrease in the rate of inflation. It's not a decrease in prices, but a slower increase in prices.

A sustained decrease in the general price level of goods and services. Prices are generally falling.

The maximum level of output an economy can produce without triggering inflation, assuming full employment and efficient use of resources.

The level of employment where virtually all individuals willing and able to work at prevailing wage rates are employed. It doesn't mean zero unemployment, as some frictional, structural, and seasonal unemployment is expected.

The unemployment rate that exists when the economy is at full employment. It includes frictional, structural, and seasonal unemployment, but not cyclical unemployment.

A short-run economic relationship showing an inverse relationship between inflation and unemployment. Lower unemployment tends to be associated with higher inflation, and vice versa.

A long-run economic relationship showing a vertical line at the natural rate of unemployment. In the long run, inflation does not affect the unemployment rate.

The relationship between inflation and unemployment is stable and inverse. As inflation rises, unemployment falls, and vice versa.

The traditional Phillips Curve failed to explain the simultaneous rise in inflation and unemployment in the 1970s.

A new model of the Phillips Curve that incorporates rational expectations and sticky wages, explaining how expectations of future inflation influence current inflation dynamics.

Prices and wages are slow to adjust due to contracts, adjustment costs, and other frictions.

When aggregate demand increases, prices rise, and sticky wages cause firms to increase supply, leading to higher employment and lower unemployment.

Expectations about future inflation are formed using all available information, not just past inflation.

The NKPC emphasizes that inflation dynamics are influenced by future economic conditions.

The short-run Phillips curve (SRPC) shows that a negative relationship exists between inflation and unemployment, implying that as one increases, the other decreases. It depicts these variables in the short-run term.

The long-run Phillips curve (LRPC) is a vertical line highlighting the concept that in the long run, there is no trade-off between inflation and unemployment. This signifies that regardless of inflation's rate, unemployment will eventually settle at its natural rate (NRU).

The inflationary gap occurs in the economy when the actual output is higher than the potential output, indicated by unemployment being lower than the natural rate of unemployment (NRU). This signifies that the economy is producing beyond its sustainable capacity.

The recessionary gap occurs when the actual output is less than the potential output. It is characterized by unemployment exceeding the natural rate of unemployment (NRU). This reveals that the economy is producing below its full potential.

The relationship between the short-run aggregate supply (SAS) curve and the short-run Phillips curve (SRPC) is a mirrored relationship. Changes in one curve will create a corresponding change in the other.

The link between the long-run aggregate supply (LAS) curve and the long-run Phillips curve (LRPC) is mirrored. The LAS curve illustrates the economy's potential output, while the LRPC shows the natural rate of unemployment (NRU).

Expansionary fiscal policy's impact on the Phillips curve in the long run leads to a shift in the short-run Phillips curve (SRPC), indicating that expansionary fiscal measures may initially reduce unemployment, but this effect is temporary. Over time, inflation rises, and the economy returns to the natural rate of unemployment (NRU).