Transcript Inflation - Houston ISD

Alban William Housego Phillips
1914-1975
Unemployment Rate [%]
Inflation
Unemployment Rate [%]
Alban William Housego Phillips
1914-1975
2
1
Inflation Rate
10%
8%
3
4%
3%
2%
4
0
1% 2%
4
4%
5% 6% 7%
NAIRU
Traditional Phillips Curve
[“Menu of Choices”]
[If the “Natural Rate of
Unemployment” is 5%]
9% 10% Unemployment
Rate
PL
LRAS
AD2
[Particular price index]
[so, partic. point in time]
SRAS
AD1
103
YI
3%
Y*
Unempl.
Alban William Housego Phillips
1914-1975
Inflation [Chg in PL over time]
5%
5
SRPC
PC
LRPC
6.8%
7
2%
1%
8
Inflat.
Gap
3%
6
5%
NAIRU
10%
Unemployment
5% is U*(F) with 2% anticipated PL.
9
Government policies are a major culprit.
Japan
Greece
U.S.
Canada
Britain
Germany
Switzerland
Italy
Finland
France
Denmark
Netherlands
8%
13%
14%
15%
16%
29%
33%
34%
36%
39%
50%
53%
The U.S. is not a good
country to be unemployed.
Price Level
[whole balloon]
240
220
210
President Bush’s $400,000 salary in 2001 would be = to
$526,256 today. [177.1 CPI in 2001 to 233.0 CPI in 2013]
$400,000 x 233.0/177.1 = $526,256
215.3 214.5
207.3
200
195.3
190
180
170
233.0
177.1 179.9
184.0
201.6
188.9
172.2
Change/Original x 100
55.9/177.1 x 100 = 32%
160
150
140
130
PL1
130
120
2000
2001
PL2
2002
2003
2004
2005
2006
2007
2008
2009
2013
233.0 – 177.1=55.9/177.1x100=32% inflation [2001-2013]
But my 5¢ will
buy a snicker.
240
Mr. Norman’s $2.60 yearly allowance in 1961[5¢ week] would
be = to $20.26 today. [29.9 CPI in 1961 to 233.0 CPI in 2013]
$2.60x233.0/29.9=$20.26 a year.
220
210
207.3
200
228.6 233.0
215.3 214.5
201.6
190
180
177.1 179.9
170
160
150
140
PL1
1961
PL2
2001
2002
2006
2007
2008
2009
2012
2013
2014
2015
When PL is anticipated,
equilibrium is the same for
both the SRAS curve & the
LRAS curve at potential output.
PL1 [103]
AD
LRAS
SRAS
E1
Y*
Real GDP
1. Increase in resources -
c
LRAS1
2. Better resource quality -
3. Technological
advances -
b
Consumer Goods
d
Price Level
Capital Goods
a
Y1 Y2
Potential RGDP
.
o
Inflation
10
10%
LRPC1
0%
NRU1
(4%)
10% Unemployment
Phillips Curve
11
Stagflation
PL
10%
AS2
AS1
3%
AD
10% 6% GDP
12
but not the LR.
PC
PL1
0
PC
PL4
PL3
PL2
PL1
o
Y1
Y2 Y3 Y4
Annual rate of *Inflation
7%
PC
6%
5%
4%
3%
1%
*Unemployment rate (percent)
Y/Employment
C
109
B
103
100
SRPC
AS
A
9% 5% 2%
Real Y/Unemployment
Inflation
Price Level
Price Level
Phillips curve
another movement up the PC
9%
3%
C
*a movement up the PC
B
A
1%
2% 5%
9%
Unemployment Rate
And if there is a beneficial supply shock
[AS shifts right], then the SRPC shifts left.
PC5
AD
AS5
AS4
AS3
AS2
AS1
Inflation
PL
PC4
PC3
PC2
PC1
Inflation Rate
GDP Speed
Limit [5%]
YF
PC
10%
8%
5%
4%
3%
2%
1%
0%
Traditional Phillips Curve
[“Menu of Choices”]
[If the “Natural Rate of
Unemployment” is 5%]
Inflation
Gap
0
1% 2% 3%
4% 5%
6% 7%
8% 9% 10%
Unemployment Rate
Annual Rate of Inflation (Percent)
15%
SRPC3
12%
b3
SRPC2
a3
9%
b2
SRPC1
6%
c3
a1
c2
b1
3%
0
a2
3
4
5
6
Unemployment Rate (Percent)
My salary just
Inflation
isn’t
keeping up.
15%
SRPC3
Wow, my raise exceeds inflation.
12%
But my raise
was only 6%.
SRPC2
9%
b3
b2
a3
SRPC1
6%
But my salary went
up by only 3%.
But when it comes time to sign
a new contract, his boss says …
a2
It can’t get any better.
My raise exceeds inflation.
c3
b1
a1
3%
c2
C1
0
3%
5%
7%
14
LRPC
Inflation
15%
SRPC3
12%
SRPC2
9%
13
b3
14
a3
b2
SRPC1
6%
3%
0
a2
c3
b1
a1
c2
Inflat.
Gap
3%
Recess.
Gap
5%
C1
7%
Annual Rate of Inflation
What is the conclusion of the Phillips curve?
The new economy was helped
by a favorable supply shock
[oil dropping from $26 to $11]
and a speedup in productivity.
98
2%
Alban William Housego Phillips
1914-1975
3.9%
97
Annual Rate of Inflation
Inflation Rate
(percent per year)
10
1980
1974
8
1979
1977
1973
4
0
1975
1978
6
2
1981
1976
1972
We had a Phillips “Curl”
Instead of a Phillips Curve.
1
2
3
4
5
6
7
8
9
10
Unemployment Rate (percent)
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)
Inflation
1
Unemployment Rate
Inflation
8%
4%
5%
• There exists a level of unemployment where inflation is not generated.
Having too little unemployment [3%] generates wage inflation, & too
much unemployment [12%] causes wages to fall. This special level of
unemployment IS NOT a constant. It varies based on the conditions and
restrictions society places upon it.
• Shifters of the NAIRU [and therefore the LRPC]
• Changes in the labor force characteristics. Age, sex, # of married both
employed couples, # of new workers entering, structural changes in demand
for labor skills, & educational level.
• Changes of government policies. Minimum wages, *unemployment
compensation, job training programs, employment subsidies to workers
or the employers.
• Changes in Productivity. Increases in productivity w/o wage increases
makes workers more desirable, and slowing of productivity without a
corresponding slowing of wage increases makes workers less desirable.
• Changes in Labor Market Institutions. Power of labor unions to negotiate
wages above equilibrium level, temporary employment agencies, and the
internet for job searches.
Annual Rate of Inflation
LRPC2 LRPC1
Y2 Y1
Unemployment
Inflation
SRPC
No LR trade-off
[just change in inflation]
Y*
4%
2%
A. W. Phillips
1914-1975
A
5% 7%
Unemployment
Inflation
SRPC
6%
LRPC
A
5%
Unemployment
LRPC
SRPC1
Inflation
SRPC2
6%
3%
A
C B
5%
Unemployment
Inflation
LRPC
SRPC
3%
1%
5%
Unemployment Rate
Inflation
LRPC
SRPC
8%
I
3%
5%
Unemployment Rate
Inflation
SRPC1
LRPC
(b) Using your graph in part (a), show the effect of
an increase in the expected rate of inflation.
4%
2%
0 2% 4% 5% 6% 8% 10%
Unemployment Rate
(c) What is the effect of the increase in the expected
rate of inflation on the long-run Phillips curve?
1.
2.
3.
4.
The SRPC is (downsloping/vertical/upsloping).
The LRPC is (downsloping/vertical/upsloping).
The Traditional PC has (1/2/3) curve(s) but the New PC has (1/2/3) curve(s).
On the PC, a recessionary gap is on the (left/right) and an inflationary gap
is on the (left/right).
5. An increase in AD causes (an increase in the SRPC/ movement up the SRPC).
6. A decrease in AD causes (a decrease in the SRPC/movement down the SRPC).
7. If the SRAS shifts left [adverse supply shock], the SRPC (shifts left/shifts right).
8. If the SRAS shifts right [beneficial supply shock], the SRPC (shifts left/shifts right).
9. (REP/C+Ig+G+Xn) shifts both the SRAS and SRPC and they shift in (the same/opposite) directions.
10. The Unemployment Rate is shown on the horizontal PC axis and (price level/inflation) is shown on the vertical PC axis.
11. There (is a/is no) SR tradeoff between Inflation and unemployment.
12. There (is a/is no) LR tradeoff between inflation and unemployment even if an easy monetary policy has increased AD in the SR.
13. The “Natural Rate Hypothesis” says there (is a/is no) tradeoff on the SRPC and that there (is a/is no) tradeoff on the LRPC.
14. (Rational Expectations/Adaptive Expectations) says there are 2 Phillips curves but (Rational Expectations/Adaptive Expectations)
says there is just one Phillips curve.
15. Assume last year unemployment was 2% and Inflation was 8%.
This year unemployment is 5% and inflation is 4% as a result of a shift in AD.
a. Draw a correctly labeled graph of a SRPC for Country X, showing the actual unemployment
and inflation rates for both years. Label the Phillips curve as SRPC.
b. Now assume the SRAS has shifted left. Name one factor that could cause this. ________________
c. Now on the graph show how this shift will affect the SRPC.
16. Assume that the natural rate of unemployment in Country X is 5%.
a. Draw a correctly labeled graph of the long-run Phillips curve and label it as LRPC.
b. What is the relationship between the unemployment rate and the inflation rate in the
long run? ________________________________________________________________
17. Assume that the government reduces the level of unemployment compensation.
a. Explain how this affects the natural rate of unemployment. __________________________
____________________________________________________________________________
b. Using a correctly labeled graph, show how this affects the long-run Phillips curve.
18. Assume the U.S. economy is operating at full-employment output. A drop in consumer
confidence reduces consumption spending, causing the economy to enter into a recession.
a. Using a correctly labeled graph of the short-run Phillips curve, show the effect of the *decrease
in consumption spending. Label the initial position “A” and the new position “B”.
b. What is the impact of the recession on the federal budget? Explain. ______________________
______________________________________________________________________________
19. Assume that the U.S economy is in long-run equilibrium with an expected inflation rate of 6%
and an unemployment rate of 5%. The nominal interest rate is 8%.
a. Using a correctly labeled graph with both the short-run and long-run Phillips curves and the
relevant numbers from above, show the current long-run equilibrium as point “A”.
b. Calculate the real interest rate in the long-run equilibrium.
____________________________________________________________________________
20. Assume that the Fed takes action to lower inflation from 6% to 3%. What will happen to each
of the following as the economy approaches a new long-run equilibrium.
a. The short-run Phillips Curve. Explain _________________________________
_______________________________________________________________
b. The natural rate of unemployment? __________________________________
_______________________________________________________________
21. Assume that the U.S. economy is currently in a recession in a short-run equilibrium.
(a) Draw a correctly labeled graph of the short run and long-run Phillips curves. Use the letter
R to label a point that could represent the current state of the economy in Recession.
22. Draw a SRPC.
(a) Show the effect of an increase in the expected rate of inflation.
(b) What effect does this have on the LRPC? __________________________________________
(c) With the expected increase in inflation, does the NIR on new loans increase, decrease, remain
unchanged?_________________________________
(d) Will the RIR on new loans increase, decrease, or remain unchanged? ________________________
(e) If NIR is 8 and expected inflation is 3%, calculate the real interest rate [RIR]. ______