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If they contract aggregate demand, they
can lower inflation, but at the cost of
temporarily higher unemployment.
The Phillips Curve
A
2
Phillips curve
0 4 7 Unemployment
Rate (percent)
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Aggregate Demand, Aggregate
Supply, and the Phillips Curve
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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.
How the Phillips Curve is Related to the Model
of Aggregate Demand and Aggregate Supply...
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(a) The Model of AD and AS (b) The Phillips Curve
Short-run Inflation Rate
Price Level AS (percent per
B year)
106 B
6
High AD
102 A
2 A
Low AD Phillips curve
0 0
7,500 8,000 4 7 Unemployment
(unemployment (unemployment (output is (output is Rate (percent)
is 7%) is 7%) 8,000) 7,500)
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The Long-Run Phillips Curve
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The Long-Run Phillips Curve...
1. When the Inflation
Rate Long-run
Fed increases
Phillips curve
the growth
rate of the High
money inflation B
supply, the
rate of 2. … but
inflation unemployment
increases… remains at its
natural rate
Low A in the long run.
inflation
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P1 AD2 A
Aggregate
demand, AD1
0 Natural rate of Quantity of 0 Natural rate of
output Output unemployment ment Rate
2. …raises the
price level…
4. …but
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at their natural rates.
Unemploy-
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The Cost of Reducing Inflation
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The Cost of Reducing Inflation
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