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The Short-Run Tradeoff Between Inflation and Unemployment
The Short-Run Tradeoff Between Inflation and Unemployment
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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
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)
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
Harcourt, Inc. items and derived items copyright leaves
© 2001 output
by Harcourt, Inc. and unemployment
at their natural rates.
Unemploy-
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The Cost of Reducing Inflation
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The Cost of Reducing Inflation
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.