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COURSE: MACROECONOMICS
ID: IM1009
Chapter 3:
Inflation and Unemployment

Contents
Session Content Readings

1-2-3 The System of National Accounts Mankiw (VN) C10, 11,12 (ENG) 22, 23, 24

4 Aggregate Demand and Aggregate Supply Mankiw (VN) C20 (ENG) 33

5-6 Inflation and Unemployment Mankiw (VN) C10, 15,17,22 (ENG) 28, 30, 35
•

7-8-9 Financial, Monetary, and Banking System Mankiw (VN) C13,16,17 (ENG) 26,29,30

10 Macroeconomics policies Mankiw (VN) C21 (ENG) 34

11-12 Open Macroeconomics Mankiw (VN) C18,19 (ENG) 31,32

13-14-
Presentation
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Look for the answers to these questions:

• How is unemployment measured?
• What is the “natural rate of unemployment”?
• Why are there always some people unemployed?
• How is unemployment affected by unions and minimum wage
laws?
• What is the theory of efficiency wages, and how does it help
explain unemployment?

Macroeconomic problems
• Inflation: Condition of constantly-rising product and factor prices
• Unemployment: Workforces are unable to find jobs
• Trade difficulties: Inefficiency in local production and allocation of
resources and outputs makes national trading less competitive.
• Lack of adequate economic growth

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Source: https://ourworldindata.org/grapher/phillips-curves-in-the-us

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Unemployment

8 - 8

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Unemployment

8 - 9

https://www.oecd.org/newsroom/unemployment-rates-oecd-update-january-2022.htm?utm_term=pac&utm_medium=social&utm_content=Non-
campaignDirectorateContent%2CStats&utm_source=facebook&fbclid=IwAR1FKbcD92_4opa8yxHuwgvCNKF9t7d9siLfF2g0X-3mEPJpGFSzIqOeMys

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https://www.oecd.org/newsroom/unemployment-rates-oecd-update-january-2022.htm?utm_term=pac&utm_medium=social&utm_content=Non-
campaignDirectorateContent%2CStats&utm_source=facebook&fbclid=IwAR1FKbcD92_4opa8yxHuwgvCNKF9t7d9siLfF2g0X-3mEPJpGFSzIqOeMys 8 - 11

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Labor Force Statistics

• GSO devides population into 3 groups:
• Employed: paid employees, self-employed, and unpaid workers
in a family business
• Unemployed: people not working who have looked for work
during previous 4 weeks
• Not in the labor force: everyone else
• Labor force = Employed + Unemployed
• The total # of workers

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Labour market flows

New hires
Recalls
Working Unemployed
Job-losers
Lay-offs
Quits

Retiring Discouraged
Temporarily workers
leaving

Out of the Re-entrants

Taking New entrants
a job
labour force

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How Is Unemployment Measured?

• An adult is over 16 years old.

• A person is considered employed if he or she has spent most of the
previous week working at a paid job.
• A person is unemployed if he or she is on temporary layoff, is looking
for a job, or is waiting for the start date of a new job.
• A person who fits neither of these categories, such as a full-time student,
homemaker, or retiree, is not in the labor force.

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Identifying unemployment
• Describing Unemployment
• Three Basic Questions:
• How does government measure the economy’s rate of unemployment?
• What problems arise in interpreting the unemployment data?
• How long are the unemployed typically without work?
• Three categories:
• Employed
• Unemployed
• Not in the labor force

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How Is Unemployment Measured?

• The labor-force participation rate is the percentage of the adult

population that is in the labor force.

Labor force participation rate

Labor force
= ´ 100
Adult population

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How Is Unemployment Measured?

• Labor Force
• The labor force is the total number of workers, including both the employed
and the unemployed.
• The labor force as the sum of the employed and the unemployed.
• The unemployment rate is calculated as the percentage of the labor
force that is unemployed.

Number unemployed
Unemployment rate = ´ 100
Labor force

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Labor Force Participation Rates for Men and Women Since 1950

8 - 18

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1. Mai just graduated from college. In order to devote all her efforts to college, she didn’t hold a job.
She is going to cruise around the country on her motorcycle for a month before she starts looking
for work. Other things the same, the unemployment rate
a. increases and the labor-force participation rate decreases.
b. and the labor-force participation rate both increase.
c. increases and the labor-force participation rate is unaffected.
d. and the labor-force participation rate are both unaffected.

2. Bình loses his job and decides to sit on the beach rather than look for work during the next few
months. Other things the same, the unemployment rate
a. increases and the labor-force participation rate decreases.
b. increases and the labor-force participation rate is unaffected.
c. is unaffected and the labor-force participation rate decreases.
d. and the labor-force participation rate are both unaffected.

3. Tuan has just finished high school and started looking for his first job, but has not yet found one.
Other things the same, the unemployment rate
a. increases and the labor-force participation rate is unaffected.
b. and the labor-force participation rate both increase.
c. is unaffected and the labor-force participation rate increases.
d. and the labor-force participation rate are both unaffected.

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4. In 2016, the Swedish adult non-institutionalized population was about 7.3 million, the labor force was
5.2 million, and the number of people employed was 4.8 million. According to these numbers, the
Swedish labor-force participation rate and unemployment rate were about
a. 71.2% and 5.5%
b. 65.8% and 7.7%
c. 65.8% and 5.5%
d. 71.2% and 7.7%
5. In 2016 the US Bureau of Labor Statistics reported that there were 71.9 million people over age 25
who had at least a bachelor’s degree. Of these 52.1 million were employed and 1.3 million were
unemployed. What were the labor-force participation rate and the unemployment rate for this group?
a. 72.5% and 1.8%
b. 72.5% and 2.4%
c. 74.3% and 2.4%
d. 74.3% and 1.8%
6. Suppose that the adult population is 6 million, the number of employed is 3.8 million, and the labor-
force participation rate is 70%. What is the unemployment rate?
a. 6.7%
b. 9.5%
c. 10.5%
d. 28%

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Why Are There Always Some People Unemployed?

• Frictional unemployment refers to the unemployment that results from the

time that it takes to match workers with jobs. In other words, it takes time for
workers to search for the jobs that are best suit their tastes and skills.
• Structural unemployment is the unemployment that results because the
number of jobs available in some labor markets is insufficient to provide a job
for everyone who wants one.
• Job search
• the process by which workers find appropriate jobs given their tastes and skills.
• results from the fact that it takes time for qualified individuals to be matched with
appropriate jobs.

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Cyclical Unemployment vs. the Natural Rate

There’s always some unemployment, though the u-rate

fluctuates from year to year.
• Natural rate of unemployment
• Normal rate of unemployment around which the actual
unemployment rate fluctuates
• Cyclical unemployment
• Deviation of unemployment from its natural rate
• Associated with business cycles, which we’ll study in later chapters

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U.S. Unemployment, 1960–2016

Unemployment rate
percentage of labor force

Natural rate of
unemployment

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Explaining the Natural Rate:

Even when the economy is doing well, there is always some

unemployment, including:
• Frictional unemployment
• Occurs when workers spend time searching for the jobs that best suit
their skills and tastes
• Short-term for most workers
• Structural unemployment
• Occurs when there are fewer jobs than workers
• Usually longer-term

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Job Search
Workers have different tastes & skills, and
jobs have different requirements.
• Job search
• Process of matching workers with appropriate jobs
• Sectoral shifts
• Changes in the composition of demand across industries or regions
of the country.
• Displace some workers, who must search for new jobs appropriate
for their skills & tastes.

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Public Policy and Job Search

• Government employment agencies
• Provide information about job vacancies to speed up the matching of workers
with jobs.
• Public training programs
• Aim to equip workers displaced from declining industries with the skills needed
in growing industries.

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Unemployment Insurance
• Unemployment insurance (UI):
• A government program that partially protects workers’ incomes when they
become unemployed
• Increases frictional unemployment.
• People respond to incentives.
• UI benefits end when a worker takes a job, so workers have less incentive to search or take
jobs while eligible to receive benefits.
• Benefits of UI:
• Reduces uncertainty over incomes
• Gives the unemployed more time to search, resulting in better job matches and
thus higher productivity

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Explaining Structural Unemployment

unemp-
Structural unemployment occurs W loyment S
when there are not enough jobs to actual
go around. W1
wage

•Occurs when wage is kept above WE

equilibrium.

•There are three reasons for this…

D
L

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1. Minimum-Wage Laws
• The minimum wage
• May exceed the equilibrium wage for the least skilled or experienced workers,
causing structural unemployment.
• But this group is a small part of the labor force, so the min. wage can’t explain
most unemployment.

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2. Unions
• Union:
• Worker association that bargains with employers over wages, benefits, and
working conditions
• Exert their market power to negotiate higher wages for workers.
• The typical union worker earns 20% higher wages and gets more benefits than a
nonunion worker for the same type of work.
• Unions raise the wage above equilibrium:
• Quantity of labor demanded falls and unemployment results.
• “Insiders” – workers who remain employed, are better off.
• “Outsiders” – workers who lose their jobs,
are worse off.
• Some outsiders go to non-unionized labor markets, which increases labor supply and
reduces wages in those markets.

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2. Unions
Are unions good or bad? Economists disagree.
• Critics:
• Unions are cartels.
• They raise wages above equilibrium, which causes
unemployment and/or depresses wages in non-union labor
markets.
• Advocates:
• Unions counter the market power of large firms, make firms
more responsive to workers’ concerns.

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3. Efficiency Wages
• Firms voluntarily pay above-equilibrium wages to boost worker productivity.
1. Worker health
• In less developed countries, poor nutrition is a common problem.
• Paying higher wages allows workers to eat better, makes them healthier, more productive.
2. Worker turnover
• Hiring & training new workers is costly.
• Paying high wages gives workers more incentive to stay, reduces turnover.
3. Worker quality
• Offering higher wages attracts better job applicants, increases quality of the firm’s
workforce.
4. Worker effort
• Workers can work hard or shirk. Shirkers are fired if caught.
• Is being fired a good deterrent?
• Depends on how hard it is to find another job.
• If market wage is above equilibirum wage, there aren’t enough jobs to go around, so
workers have more incentive to work not shirk.
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Structural Unemployment
Real D S
wage
w/P
involuntary
unemployment
(w/P)1 K
G H

(w/P)0 F
E0

voluntary
unemployment

L1 L0 L Labor

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7. Cyclical unemployment 10. Consumers decide to buy more

a. has a different explanation than does the natural rate of
unemployment.
b. refers to the year-to-year fluctuation in unemployment around an
economy’s natural rate of unemployment.
c. is closely associated with short-run ups and downs of economic
activity.
d. All of the above are correct.
8. More generous unemployment insurance would
a. raise structural unemployment.
b. raise frictional unemployment.
c. lower structural unemployment.
d. lower frictional unemployment.
9. John is a stockbroker. He has had several job offers, but he
has turned them down because he thinks he can find a firm
that better matches his tastes and skills. Curtis has looked
for work as an accountant for some time. While the demand
for accountants doesn’t appear to be falling, there seems to
be more people applying than jobs available.
a. John and Curtis are both frictionally unemployed.
b. John and Curtis are both structurally unemployed.
c. John is frictionally unemployed, and Curtis is structurally
unemployed.
d. John is structurally unemployed, and Curtis is frictionally
unemployed.
computers and fewer typewriters. As a
result, computer companies expand
production while typewriter companies
lay-off workers. This is an example of
a. frictional unemployment created by
efficiency wages.
b. frictional unemployment created by sectoral
shifts.
c. structural unemployment created by
efficiency wages.
d. structural unemployment created by
sectoral shifts.
11. Unemployment that exists because there
is a shortage of jobs is
a. frictional unemployment, which contributes
to the natural rate of unemployment.
b. frictional unemployment, which does not
contribute to the natural rate of
unemployment.
c. structural unemployment, which contributes
to the natural rate of unemployment.
d. structural unemployment, which does not
contribute to the natural rate of
unemployment.

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12. If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7 percent, then
by definition there is
a. cyclical unemployment amounting to 0.5 percent of the labor force.
b. frictional unemployment amounting to 0.5 percent of the labor force.
c. structural unemployment amounting to 0.5 percent of the labor force.
d. search unemployment amounting to 0.5 percent of the labor force.
13. Suppose that some people are counted as unemployed when, to maintain unemployment compensation,
they search for work only at places where they are unlikely to be hired. If these individuals were counted
as out of the labor force instead of as unemployed, then
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be lower and the labor-force participation rate would be higher.
d. the unemployment rate would be higher and the participation rate would be lower.
14. Unemployment that results because the number of jobs available in some labor markets may be insuffi-
cient to give a job to everyone who wants one is called
a. the natural rate of unemployment.
b. cyclical unemployment.
c. structural unemployment.
d. frictional unemployment.
15. Unemployment that results because it takes time for workers to search for the jobs that best suit their
tastes and skills is called
a. the natural rate of unemployment.
b. cyclical unemployment.
c. frictional unemployment.
d. structural unemployment.

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Summary
• The unemployment rate is the percentage of those who would like to work who do
not have jobs.
• Unemployment and labor force participation vary widely across demographic
groups.
• The natural rate of unemployment is the normal rate of unemployment around
which the actual rate fluctuates. Cyclical unemployment is the deviation of
unemployment from its natural rate and is connected to short-term economic
fluctuations.
• The natural rate includes frictional unemployment and structural unemployment.
• Frictional unemployment occurs when workers take time to search for the right jobs.
• Structural unemployment occurs when above- equilibrium wages result in a surplus
of labor.
• Three reasons for above-equilibrium wages include minimum wage laws, unions, and
efficiency wages.
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INFLATION

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Look for the answers to these questions:

• How does the money supply affect inflation and nominal
interest rates?
• Does the money supply affect real variables like real GDP or
the real interest rate?
• How is inflation like a tax?
• What are the costs of inflation? How serious are they?

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Zimbabwe
• Saturday, March 28, 2009
• 1 US Dollar = 37,456,777 Zimbabwe Dollar
• 1 Zimbabwe Dollar (ZWD) = 0.00000003 US Dollar (USD)
• Zimbabwe's $100 billion banknote with 3 eggs it could
purchase on its release date

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Inflation
§ Makes Production and distribution less efficient
§ Creates Uncertainties about costs and makes planning more difficult and
uncertain.
§ Makes it hard for long-term agreement
§ Money is unable to fulfill its functions: Medium of exchange, Unit of
account, Store of value, and Standard of deferred payment
§ Export is more expensive, import is cheaper and grow in Volume.

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Inflation
• Inflation is a rise in the average price of goods over time
• Why is inflation bad?
• Inflation does have bad effects, but some popular criticisms are based on
spurious reasoning
• What are the causes of inflation?
• What can be done about it?

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Money and prices

• Milton Friedman famously claimed
• ‘Inflation is always and everywhere a monetary phenomenon.’
• i.e. it results when money supply grows more rapidly than real
output.
• But this does not prove that causation is always from money
to prices
• e.g. if the government adopts an accommodating monetary policy.

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Money Supply (MS) and Money deman

• Money supply in the real world
• Determined by the central bank, the banking system, and consumers.
• Money supply in this model
• We assume the CB precisely controls MS and sets it at some fixed amount.
• Money demand
• Refers to how much wealth people want to hold in liquid form.
• Depends on P: an increase in P reduces the value of money, so more money is
required to buy goods and services.
• Quantity of money demanded
• Is negatively related to the value of money
• And positively related to P, other things equal.

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The Money Supply-Demand Diagram

Value of Price
Money, 1/P Level, P
As the value of
money rises, the
1 1
price level falls.
¾ 1.33

½ 2

¼ 4

Quantity
of Money
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The Money Supply-Demand Diagram

Value of Price
Money, 1/P MS 1 Level, P

1 1

¾ 1.33

The CB sets MS
½ 2
at some fixed value,
regardless of P.
¼ 4

$1000 Quantity
of Money
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The Money Supply-Demand Diagram

Value of A fall in value of money Price
Money, 1/P (or increase in P) Level, P
increases the quantity
1 of money demanded: 1

¾ 1.33

½ 2

¼ 4
MD 1

Quantity
of Money
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The Money Supply-Demand Diagram

Value of P adjusts to equate Price
Money, 1/P MS 1 quantity of money Level, P
demanded with
1 money supply. 1

¾ 1.33
eq’m eq’m
value A
½ 2 price
of level
money
¼ 4
MD 1

$1000 Quantity
of Money
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The Effects of a Monetary Injection

Value of Price
Money, 1/P MS 1 MS 2 Level, P

Suppose the
1 CB 1
Then the value
increases the of money falls,
money supply.
¾ and P rises.
1.33

A
½ 2
eq’m eq’m
value B
¼ 4 price
of MD 1 level
money
$1000 $2000 Quantity
of Money
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A Brief Look at the Adjustment Process

• From graph: Increasing MS causes P to rise.
• How does this work? Short version:
• At the initial P, an increase in MS causes an excess supply of
money.
• People get rid of their excess money by spending it on goods and
services or by loaning it to others, who spend it. Result:
increased demand for goods.
• But supply of goods does not increase, so prices must rise.

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Real vs. Nominal Variables

• Nominal variables
• Are measured in monetary units.
• Examples: nominal GDP, nominal interest rate (rate of return measured in $), nominal wage
($ per hour worked)
• Real variables
• Are measured in physical units.
• Examples: real GDP, real interest rate (measured in output), real wage (measured in output)

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Real vs. Nominal Variables

• Prices are normally measured in terms of
money:
• Price of a compact disc: $15/cd
• Price of a pepperoni pizza: $10/pizza
• A relative price
• Is the price of one good relative to (divided by)
another
• Relative price of CDs in terms of pizza:

price of cd $15/cd
= = 1.5 pizzas per cd
price of pizza $10/pizza
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Real vs. Nominal Wage

• An important relative price is the real wage:
• W = nominal wage = price of labor, e.g., $15/hour
• P = price level = price of goods and services, e.g., $5/unit of output
• Real wage
• Is the price of labor relative to the price of output:

W $15/hour
= = 3 units output per hour
P $5/unit of output
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The Velocity of Money

• Velocity of money:
• The rate at which money changes hands
• Notation:
P x Y= nominal GDP = (price level) x (real GDP)
M = money supply
V = velocity
• Velocity formula:
PxY
V =
M

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The Velocity of Money

• Velocity formula V = P x Y / M
• Example with one good: pizza. In 2015:
Y = real GDP = 3000 pizzas
P = price level = price of pizza = $10
P x Y= nominal GDP = value of pizzas = $30,000
M = money supply = $10,000
V = velocity = $30,000/$10,000 = 3
The average dollar was used in 3 transactions.

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U.S. Nominal GDP, M2, and Velocity 1960–2016 •Velocity is fairly stable
over the long run.

Nominal GDP
M2
1960=100

Velocity

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The Quantity Theory

• The quantity equation: M x V = P x Y
1. V is stable.
2. A change in M causes nominal GDP (P x Y) to change by the same
percentage.
3. A change in M does not affect Y: money is neutral, Y is determined
by technology & resources
4. So, P changes by same percentage as
P x Y and M.
5. Rapid money supply growth causes rapid inflation.

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Active Learning
Quantity Theory of Money
One good: corn. The economy has enough labor, capital, and land to
produce Y = 800 bushels of corn. V is constant. In 2014, MS = $2000,
P = $5/bushel.
For 2015, the Fed increases MS by 5%, to $2100.
a. Compute the 2015 values of nominal GDP and P. Compute the inflation
rate for 2014–2015.
b. Suppose tech. progress causes Y to increase to 824 in 2015. Compute
2014–2015 inflation rate.

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Active Learning Answers

Y = 800, V is constant.
In 2014, MS = $2000, P = $5/bushel.
For 2015, the Fed increases MS by 5%, to $2100.
a. Compute the 2015 values of nominal GDP and P. Compute the inflation
rate for 2014–2015.
• 2014: P x Y = M x V, so V= 2
• 2015: nominal GDP = P x Y = M x V = 2100 x 2 = $4200
• 2015: P = M x V / Y = 4200/800 = $5.25
• Inflation rate 2014-2015 = (5.25 – 5.00)/5.00 = 5% (same as MS!)

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Active Learning Answers

Y = 800, V is constant.
In 2014, MS = $2000, P = $5/bushel.
For 2015, the Fed increases MS by 5%, to $2100.
b. Suppose tech. progress causes Y to increase to 824 in 2015. Compute
2014–2015 inflation rate.
• 2015: P = M x V / Y = 4200/824 = $5.10
• Inflation rate 2014-2015 = (5.10 – 5.00)/5.00 = 2%

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Lessons about the quantity theory of money

• If real GDP is constant,
• Then inflation rate = money growth rate.
• If real GDP is growing,
• Then inflation rate < money growth rate.
• The bottom line:
• Economic growth increases # of transactions.
• Some money growth is needed for these extra transactions.
• Excessive money growth causes inflation.

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Hyperinflation
• Hyperinflation
• Inflation exceeding 50% per
month.
• Prices rise when the
government prints too much
money.
• Excessive growth in the money
supply always causes
hyperinflation.

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The Inflation Tax

• The inflation tax
• Revenue the government raises by creating (printing) money
• Tax on everyone who holds money
• When the government prints money
• The price level rises
• And the dollars in your wallet are less valuable

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1. Hyperinflation can be explained by

a. the market for loanable funds.
b. the velocity theory of money.
c. the quantity theory of money.
d. the market for federal funds.
2. When the price level rises, the number of dollars
needed to buy a representative basket of goods 4. If the money supply is MS2 and the value of money is
a. increases, and so the value of money rises. 2, then there is an excess
b. increases, and so the value of money falls. a. demand for money that is represented by the distance
c. decreases, and so the value of money rises. between points A and C.
d. decreases, and so the value of money falls b. demand for money that is represented by the distance
3. The value of money rises as the price level between points A and B.
c. supply of money that is represented by the distance
a. rises, because the number of dollars needed to buy a
between points A and C.
representative basket of goods rises.
d. supply of money that is represented by the distance
b. rises, because the number of dollars needed to buy a between points A and B.
representative basket of goods falls.
5. When the money supply curve shifts from MS1 to
c. falls, because the number of dollars needed to buy a MS2,
representative basket of goods rises.
a. the demand for goods and services decreases.
d. falls, because the number of dollars needed to buy a
b. the economy's ability to produce goods and services
representative basket of goods falls. increases.
c. the equilibrium price level decreases.
d. None of the above is correct.

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6. An assistant professor of economics gets a $100 a month raise, but then she figures that with her
current monthly salary she can’t buy as many goods as she could last year.
a. Her real and nominal salary have risen.
b. Her real and nominal wage have fallen.
c. Her real wage has risen and her nominal wage has fallen.
d. Her real wage has fallen and her nominal wage has risen.
7. Based on the quantity equation, if M = 100, V = 3, and Y = 200, then P =
a. 1.
b. 1.5.
c. 2.
d. None of the above is correct.
8. According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V
be?
a. 800, 4
b. 600, 3
c. 400, 2
d. 200, 1
9. If Y and V are constant, and M doubles, the quantity equation implies that the price level
a. more than doubles.
b. less than doubles.
c. doubles.
d. might do any of the above; more information is needed.

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Demand pull inflation

Price AD1 AD2 AS
level

P1

P0 E0

Y0 Y1 Output

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Cost push inflation

Price AD AS2
level

AS1

P1

P0
E0

Q1 Q0 Output

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The Costs of Inflation

• Inflation fallacy
• “Inflation robs people of the purchasing power of his hard-earned dollars”
• When prices rise
• Buyers – pay more
• Sellers – get more
• Inflation does not in itself reduce people’s real purchasing power

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The Costs of Inflation

• Shoeleather costs
• Resources wasted when inflation encourages people to reduce their money
holdings
• Can be substantial
• Menu costs
• Costs of changing prices
• Inflation – increases menu costs that firms must bear

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Inflation-Induced Tax Distortions

• Taxes – distort incentives
• Many taxes - more problematic in the presence of inflation
• Tax treatment of capital gains
• Capital gains – Profits:
• Sell an asset for more than its purchase price
• Inflation discourages saving
• Exaggerates the size of capital gains
• Increases the tax burden
• Tax treatment of interest income
• Nominal interest earned on savings
• Treated as income
• Even though part of the nominal interest rate compensates for inflation
• Higher inflation
• Tends to discourage people from saving
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71

How Inflation Raises the Tax Burden on Saving

In the presence of zero inflation, a 25 percent tax on interest income reduces the real interest rate
from 4 percent to 3 percent. In the presence of 8 percent inflation, the
same tax reduces the real interest rate from 4 percent to 1 percent.

72

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10. You put money in an account and earn a real 13. Suppose someone in Paradise bought a
interest rate of 4 percent. Inflation is 2 percent, parcel of land for $20,000 in 2000 when the
and your marginal tax rate is 20 percent. What price index equaled 100. In 2020, the person
is your after-tax real rate of interest? sold the land for $100,000, and the price
a. 1.2 percent index equaled 600. If the person must pay 20
b. 2.8 percent percent of any capital gain in taxes, then the
c. 4.8 percent after-tax real capital gain (in 2020 dollars) on
d. None of the above is correct. the land was
11. You put money in an account and earn a real a. $64,000.
interest rate of 6 percent, inflation is 2 percent, b. –$36,000.
and your marginal tax rate is 20 percent. What c. –$16,667
is your after-tax real rate of interest? d. –$3,333
a. 4.8 percent 14. Suppose someone in Paradise bought a
b. 3.2 percent parcel of land for $10,000 in 2000 when the
c. 2.8 percent price index equaled 100. In 2020, the person
d. None of the above is correct. sold the land for $100,000, and the price
12. Given a nominal interest rate of 5 percent, in index equaled 500. If the person must pay 20
which case below would you earn the highest percent of any capital gain in taxes, then the
after-tax real rate of interest? after-tax real capital gain (in 2020 dollars) on
a. Inflation is 4 percent; the tax rate is 20 percent. the land was
b. Inflation is 3 percent; the tax rate is 40 percent. a. $72,000.
c. Inflation is 2 percent; the tax rate is 60 percent. b. $62,000.
d. The after-tax real interest rate is the same for all of c. $32,000.
the above. d. $6,400.

73

The Phillips curve

Prof. A W Phillips demonstrated a statistical relationship
between annual inflation and unemployment in the UK
Inflation rate (%)

The Phillips curve shows

that a higher inflation rate
Phillips curve
is accompanied by a
lower unemployment rate.

It suggests we can
trade-off more inflation for
less unemployment or
vice versa.
Unemployment rate (%)
8 - 74

74

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 02/01/2023

Inflation (%)
26
Phillips loops in the UK?
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10 90
73 71
8 78 82
89
72
6 91 85
88 84
87 83
4 98 95
00 97 92 86
94
2 01 96
93
02 99
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

75

Inflation (%)
The breakdown of the Phillips curve?
26

24

22

20

18

16

14

12

10

6
65
Original Phillips curve
4 66 62
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

76

38
 02/01/2023

Inflation (%)
The breakdown of the Phillips curve?
26

24

22

20

18

16 74

14

12

10
73 71
8
72
70
6
69
65
68
4 66 62
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

77

Inflation (%)
The breakdown of the Phillips curve?
26
75
24

22

20

18
76
16 74 77
14
79
12

10
73 71
8 78
72
70
6
69
65
68
4 66 62
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

78

39
 02/01/2023

Inflation (%)
The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10
73 71
78 82
8
72
70
6 85
69 84
65 83
68
4 66 62
61 64 67
2
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

79

Inflation (%)
The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10 90
73 71
78 89 82
8
72
70
6 91 85
69 88 84
65 83
68 87
4 66 62 95 86
92
61 64 67 94
2 93
63
60
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

80

40
 02/01/2023

Inflation (%)
The breakdown of the Phillips curve?
26
75
24

22

20

18 80
76
16 74 77
14
79
12 81

10 90
73 71
78 89 82
8
72
6 70
91 85
69 88 84
65 83
68 87
4 66 62 00 98
95 86
03 97 92
61 64 67 94
2 96
63 02 99 93
60 01
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Unemployment (%)

81

Inflation

0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00%

82

41