Chapter 8 Inflation, Unemployment and Short-Run Trade Off

04/02/2024
N. GREGORY MANKIW
PRINCIPLES OF
ECONOMICS
Eighth Edition
Seven Edition
CHAPTER Inflation and

8 Unemployment
Premium PowerPoint Slides by:
V. Andreea CHIRITESCU
Van Tran, PhD.
Eastern Illinois University
Outline
1. What is inflation
2. Measures of inflation
3. Sources of inflation
4. Types of inflation
5. The cost of inflation
6. Definitions of unemployment
7. Measures of unemployment
8. Types of unemployment
9. Sources of unemployment
10. The relationship between inflation and unemployment
Van Tran 2023 ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 2
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
1. What is inflation?
• Inflation (Lạm phát)

an increase in the overall price level over time
• Deflation (Giảm phát)

a decrease in the overall price level over time
• Disinflation (Giảm lạm phát)

a decrease in the rate of inflation over time
1
04/02/2024
2. Measures of inflation
• The consumer price index

• Calculating CPI
• Problems with the CPI
• CPI vs GDP deflator
The consumer price index
• Consumer price index (CPI)

– Measure of the overall level of prices
– Measure of the overall cost of goods and services bought by a
typical consumer
– Computed and reported every month
Calculating CPI
1. Fix the basket

– Using consumers surveys to determine what’s in the typical
consumer’s “shopping basket.”
2. Find the prices

– collects data on the prices of all the goods in the basket
3. Compute the basket’s cost

– Use the prices to compute the total cost of the basket
2
04/02/2024
Calculating CPI
4. Chose a base year and compute the CPI

– Cost of basket of goods and services in current year divided by
cost of basket in base year
CPIt   pit  qi0  100

 pi0  qi0
pit , pi0 price of good i at time ti and time t0
qi0 quantity of good i at time t0
Calculating CPI
5. Compute the inflation rate

– The percentage change in the CPI from the preceding period
CPI this year−CPI last year

Inflation rate = × 100
CPI last year
Example: basket: {4 pizzas, 10 lattes}
price of price of
year cost of basket
pizza latte
2014 $10 $2.00 $10 x 4 + $2 x 10 = $60
2015 $11 $2.50 $11 x 4 + $2.5 x 10 = $69
2016 $12 $3.00 $12 x 4 + $3 x 10 = $78
Compute CPI in each year (2014 base year)?

Compute inflation rate?
3
04/02/2024
What’s in the CPI’s basket?
10
Cơ cấu rổ hàng hóa trong CPI, Vn 2007
9. Văn hóa, thể Nhóm hàng hóa %

thao, giải trí
10. Đồ dùng và 1. Hàng ăn và dịch vụ ăn uống 42.85
8. Giáo dục các dịch vụ khác
5% 2. Đồ uống và thuốc lá 4.56
3. May mặc, giày dép, mũ nón 7.21
7. Phương tiện đi
lại, bưu điện
4. Nhà ở và vật liệu xây dựng 9.99
9%
5. Thiết bị và đồ dùng gia đình 8.62
1. Hàng ăn và dịch
vụ ăn uống
6. Dược phẩm y tế 43% 6. Dược phẩm y tế 5.42
5%
7. Phương tiện đi lại, bưu điện 9.04
8. Giáo dục 5.41
5. Thiết bị và đồ
dùng gia đình
9% 9. Văn hóa, thể thao, giải trí 3.59
10.Đồ dùng và các dịch vụ khác 3.31
4. Nhà ở và vật
liệu xây dựng Tổng 100
10%
2. Đồ
3. May mặc, giày uống và
thuốc lá
Nguồn: Thời báo Kinh tế Vn (2008)
dép, mũ nón
7%
Active Learning 2 Substitution bias

cost of CPI
beef chicken
basket
CPI basket: 2014 $4 $4 $120
{10 lbs beef,
20 lbs chicken} 2015 $5 $5 $150
In 2014 and 2015, 2016 $9 $6 $210
households
bought CPI basket.
In 2016, households bought {5 lbs beef, 25 lbs chicken}.
A. Compute cost of the 2016 household basket.
B. Compute % increase in cost of household basket over
2015–2016, compare to CPI inflation rate.
12
4
04/02/2024
Active Learning 2 Answers

cost of CPI
beef chicken
basket
CPI basket: 2014 $4 $4 $120
{10 lbs beef,
20 lbs chicken} 2015 $5 $5 $150
In 2014 and 2015, 2016 $9 $6 $210
households
bought CPI basket.
A. Compute cost of the 2016 household basket.
($9 x 5) + ($6 x 25) = $195
13

cost of CPI
CPI basket: beef chicken
basket
{10 lbs beef,
2014 $4 $4 $120
20 lbs chicken}
In 2014 and 2015, 2015 $5 $5 $150
households 2016 $9 $6 $210
bought CPI basket.
B. Compute % increase in cost of household basket over
2015–2016, compare to CPI inflation rate.
Rate of increase: ($195 – $150)/$150 = 30%
CPI inflation rate from previous problem = 40%
14
Problems with the CPI

• Substitution bias
– Over time, some prices rise faster than others (Thay đổi giá
tương đối các mặt hàng)
– Consumers substitute toward goods that become relatively
cheaper, mitigating the effects of price increases (Người tiêu
dùng điều chỉnh rổ hàng khi giá tương đối thay đổi)
– The CPI misses this substitution because it uses a fixed basket
of goods (Trong khi CPI sử dụng rổ hàng cố định)
– Thus, the CPI overstates increases in the cost of living.
5
04/02/2024

• Introduction of New Goods
– The introduction of new goods increases variety, allows
consumers to find products that more closely meet their
needs (Luôn xuất hiện hàng hóa mới)
– In effect, dollars become more valuable.
– The CPI misses this effect because it uses a fixed basket of
goods (CPI dùng rổ hàng hóa cũ)
– Thus, the CPI overstates increases in the cost of living.

• Unmeasured Quality Change
– Improvements in the quality of goods in the basket increase
the value of each dollar.
– We try to account for quality changes but probably misses
some, as quality is hard to measure.
– Thus, the CPI overstates increases in the cost of living. (CPI
không phản ánh được cải thiện chất lượng hàng hóa theo
thời gian)

• Each of these problems causes the CPI to overstate cost of living
increases.
– We can do technical adjustments,
but the CPI probably still overstates inflation by about 0.5
percent per year.
– This is important because Social Security payments and many
contracts have COLAs (Cost of Living Adjustments) tied to the
CPI.
6
04/02/2024
CPI vs GDP deflator
CPIt   pit  qi0  100

𝐺𝐷𝑃𝑛
 pi0  qi0 𝐺𝐷𝑃𝑑𝑓 =
𝐺𝐷𝑃𝑟
• Imported consumer goods:

– Included in CPI
– Excluded from GDP deflator
• Capital goods:
– Excluded from CPI
– Included in GDP deflator (if produced domestically)
CPI vs GDP deflator
• The basket:
– CPI uses fixed basket
– GDP deflator uses basket of currently produced goods &
services
– This matters if different prices are
changing by different amounts.
Two Measures of Inflation, 1965–2016
GDP deflator
Percent change per year
CPI
21
7
04/02/2024
Active Learning 3 CPI vs. GDP deflator

In each scenario, determine the effects on the CPI and the
GDP deflator.
A. Starbucks raises the price of Frappuccinos.
B. Caterpillar raises the price of the industrial tractors it
manufactures at its Illinois factory.
C. Armani raises the price of the Italian jeans it sells in the
U.S.
22

A. Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
B. Caterpillar raises the price of the industrial tractors it
manufactures at its Illinois factory.
The GDP deflator rises, the CPI does not.
C. Armani raises the price of the Italian jeans it sells in the
U.S.
The CPI rises, the GDP deflator does not.
23
3. Sources of inflation
• The quantity theory of money (Lý thuyết khối lượng tiền)

• The velocity of money (Vòng xoay của tiền)
• Demand-pull (Lạm phát do cầu kéo)
• Cost-push (Lạm phát do chi phí đẩy)
• Inflation expectation (Lạm phát kỳ vọng)
8
04/02/2024
The quantity theory of money
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
Van Tran 2023 ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 25
Value of Price
Money, 1/P MS1 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
Value of Price
Money, 1/P A fall in value of money (or Level, P
increase in P) increases the
quantity of money
1 1
demanded:
¾ 1.33
½ 2
¼ MD1 4
Quantity of Money
9
04/02/2024
Value of Price
Money, 1/P MS1 P adjusts to equate Level, P
quantity of money
1 demanded with 1
money supply.
¾ 1.33
eq’m eq’m
value A
½ 2 price
of
level
money
¼ 4
MD1
$1000 Quantity
of Money
Value of Price
Money, 1/P MS1 MS2 Level, P
Suppose the1 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 MD1 level
money
$1000 $2000 Quantity
of Money
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
• The quantity equation:
MxV=PxY or PxY
V =
M
10
04/02/2024
• 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.
• Prices rise when the government prints too much money.

– Excessive growth in the money supply always causes
hyperinflation.
• 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.
11
04/02/2024
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.
Demand-pull inflation
P LRAS
SRAS
P1 E1
P0 E0
AD1
AD0
Y0 Y1 Y
Cost-push inflation
P ASLR
AS1
E1
P1
AS0
P0 E0
AD0
Y1 Y0 Y
12
04/02/2024
Inflation expectation
• Inflation happens because people expect price level to rise over

time.
• People expect price to rise because it usually rises over time.
4. Types of inflation
• Moderate inflation
• High inflation
• Hyperinflation
– Inflation exceeding 50% per month.
Hyperinflation in Zimbabwe
• Large government budget deficits

– Led to the creation of large quantities of money and high
inflation rates.
Sign posted in public restroom date Zim$ per US$
Aug 2007 245
Apr 2008 29,401
May 2008 207,209,688
June 2008 4,470,828,401
July 2008 26,421,447,043
Feb 2009 37,410,030
Sept 2009 355
13
04/02/2024
Lạm phát ở Việt Nam, 1982-2005

775
750
650
550
450
350 349
250
223
150
97
81 67 68
66 36
50 44 14.4
18 5.2 13 4.5 9.2 3 9.5 8.4
3.6 0.1 0.8 4
-0.6
-50
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Hyperinflation in Germany
5. The costs of inflation
• The Inflation Tax

• The Fisher Effect
• Inflation fallacy
• Shoe-leather costs
• Menu costs
• Misallocation of resources
• Confusion and inconvenience
• Tax distortions
• Arbitrary redistributions of wealth
14
04/02/2024
The inflation tax
• Revenue the government raises by creating (printing) money

• Like a tax on everyone who holds money
– When the CB prints money (khi CB in tiền)
– The price level rises (Mức giá tăng)
– And the dollars in your wallet are less valuable (thu nhập
thực của các gia đình giảm)
• In the U.S., the inflation tax today accounts for less than
3% of total revenue
The Fisher Effect
• Principle of monetary neutrality

– An increase in the rate of money growth raises the rate of
inflation but does not affect any real variable
• Because
Real interest rate = Nominal interest rate – Inflation rate
• We get
Nominal interest rate = Real interest rate + Inflation rate
The Fisher Effect
• Fisher effect
– One-for-one adjustment of nominal interest rate to inflation
rate
– When the CB increases the rate of money growth
– Long-run result
• Higher inflation rate
• Higher nominal interest rate
15
04/02/2024
U.S. Nominal Interest & Inflation Rates, 1960–2016

• The close relation
between these variables
is evidence for the Fisher
effect.
Nominal
interest rate
Inflation rate
46
Inflation fallacy
• “Inflation robs people of the purchasing power of his hard-

earned dollars”
• When prices rise
– Buyers pay more (Người mua phải trả nhiều hơn)
– Sellers get more (Người bán nhận được nhiều hơn)
• Inflation does not in itself reduce people’s real purchasing power
47
U.S. Average Hourly Earnings & the CPI 1965 - 2016
• Inflation causes
the CPI and
nominal wages
to rise together over
the long run.
Nominal wage
CPI
48
16
04/02/2024
Shoe-leather costs
• Resources wasted when inflation encourages people to reduce

their money holdings (Khi lạm phát cao, các gia đình nắm giữ ít
tiền mặt hơn, do đó họ giao dịch với ngân hàng nhiều hơn)
• Can be substantial
Menu costs
• Costs of changing prices

• Inflation – increases menu costs that firms must bear
Misallocation of resources
• Misallocation of resources from relative-price variability:
– Firms don’t all raise prices at the same time, so relative prices
can vary
– Distorts the allocation of resources
17
04/02/2024
Confusion and inconvenience

• Confusion and inconvenience:
– Inflation changes the yardstick we use to measure
transactions
• Complicates long-range planning and the comparison of
dollar amounts over time
Tax distortions
• Tax distortions:
– Inflation makes nominal income grow faster than real
income.
– Taxes are based on nominal income,

and some are not adjusted for inflation.
– So, inflation causes people to pay more taxes even when

their real incomes don’t increase.
Active Learning 3 Tax distortions
You deposit $1000 in the bank for one year.

CASE 1: inflation = 0%, nom. interest rate = 10%
a. In which case does the real value of your deposit grow the
most?
Assume the tax rate is 25%.
b. In which case do you pay the most taxes?
c. Compute the after-tax nominal interest rate,
then subtract inflation to get the after-tax real interest rate
for both cases.
54
18
04/02/2024
Deposit $1000.
a. In which case does the real value of your deposit grow the
most?
In both cases, the real interest rate is 10%,
so the real value of the deposit grows 10% (before
taxes).
55
Deposit $1000. Tax rate =25%.

b. In which case do you pay the most taxes?

CASE 1: interest income = $100,
so you pay $25 in taxes.
CASE 2: interest income = $200,
so you pay $50 in taxes.
56

c. Compute the after-tax nominal interest rate,
then subtract inflation to get the after-tax real interest rate
for both cases.
CASE 1: nominal = 0.75 x 10% = 7.5%
real = 7.5% – 0% = 7.5%
CASE 2: nominal = 0.75 x 20% = 15%
real = 15% – 10% = 5%
57
19
04/02/2024
Active Learning 3 Summary and lessons

Inflation…
• raises nominal interest rates (Fisher effect) but not real
interest rates
• increases savers’ tax burdens
• lowers the after-tax real interest rate
58
Arbitrary redistributions of wealth
• Unexpected inflation
– Redistributes wealth among the population
• Not by merit
• Not by need
– Redistribute wealth among debtors and creditors
• Inflation: volatile and uncertain
– When the average rate of inflation is high
5. The costs of inflation
• All these costs

– Are quite high for economies experiencing hyperinflation.
• For economies with low inflation (< 10% per year),
– These costs are probably much smaller,
though their exact size is open to debate.
20
04/02/2024
Correcting variables for inflation

• Comparing dollar figures from different times
– Inflation makes it harder to compare dollar amounts from
different times.
• Example: the minimum wage
• $1.25 in Dec 1963
• $7.25 in Dec 2013
– Did min wage have more purchasing power in Dec 1963 or
Dec 2013?
– To compare, use CPI to convert 1963 figure into “2013
dollars”…

• Dollar figures from different times
Amount in today′s dollars =
Price level today
= Amount in year T dollars ×
Price level in year T
• In our example:
– “year T ” is 1963, “today” is 2013
– Min wage was $1.25 in year T
– CPI = 30.9 in year T, CPI = 234.6 today
– The minimum wage in 1963 was”
$1.25 x 234.6/30.9 = $9.49 in 2013 dollars.

• Comparing dollar figures from different times
– Researchers, business analysts, and policymakers often use this
technique to convert a time series of current-dollar (nominal)
figures into constant-dollar (real) figures.
– They can then see how a variable has changed over time after
correcting for inflation.
– Example: the minimum wage…
21
04/02/2024
The U.S. Minimum Wage in Current Dollars

and Today’s Dollars, 1960–2013
2013 dollars
current dollars
64
Active Learning 4 Comparing tuition increases

Tuition and Fees at U.S. Colleges and Universities
1990 2015
Private non-profit 4-year $9,340 $32,405
Public 4-year $1,908 $9,410
Public 2-year $906 $3,435

CPI 130.7 237.7
• Express the 1990 tuition figures in 2015 dollars, then compute the
percentage increase in real terms for all three types of schools.
• Which type experienced the largest increase in real tuition costs?
65
1990 2015 % change

CPI 130.7 237.7 81.9%
Private non-profit 4-year
$9,340 $32,405
(current $)
Private non-profit 4-year
$16,986 $32,405 90.8%
(in 2015 $)
Public 4-year (current $) $1,908 $9,410
Public 4-year (in 2015 $) $3,470 $9,410 171.2%
Public 2-year (current $) $906 $3,435
Public 2-year (in 2015 $) $1,648 $3,435 108.4%
66
22
04/02/2024
• Indexation
– A dollar amount is indexed for inflation
if it is automatically corrected for inflation
by law or in a contract.
• The increase in CPI automatically determines:
– The COLA in many multi-year labor contracts.
– Adjustments in Social Security payments and federal income
tax brackets.
Real vs. Nominal Interest Rates

• The nominal interest rate:
– Interest rate not corrected for inflation
– Rate of growth in the dollar value of a deposit or debt
• The real interest rate:
– Corrected for inflation
– Rate of growth in the purchasing power of a deposit or debt
Real interest rate=(nominal interest rate)–(inflation rate)
Real vs. Nominal Interest Rates
Example:
– Deposit $1,000 for one year.
– Nominal interest rate is 9%.
– During that year, inflation is 3.5%.
– Real interest rate
= Nominal interest rate – Inflation
= 9.0% – 3.5% = 5.5%
– The purchasing power of the $1000 deposit
has grown 5.5%.
23
04/02/2024
Real and Nominal Interest Rates in the U.S.,

1960–2015
Interest rate (percent per year)
Real
Nominal
70
7. Definition of unemployment
• The population is divided into 3 groups:
– Labor force
• 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
• Children under 16 and the elderly (60+)
• The disabled
• Those who decide not to work (students, …)
Labor force statistics
• The unemployment rate

𝑈
𝑢= ∙ 100
𝐿
𝑢 : unemployment rate,
U: the number of unemployed,
L: labour force
• Labor-force participation rate
– % of the adult population that is in the labor force
Labor force
Labor−force participation rate = 100 ×
Adult population
24
04/02/2024
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
U.S. Unemployment, 1960–2016
Unemployment rate
percentage of labor force
Natural rate of
unemployment
74
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
25
04/02/2024
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.
Natural rate of unemployment
• 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.
• 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.
26
04/02/2024
• Benefits of UI:
– Reduces uncertainty over incomes
– Gives the unemployed more time to search, resulting in
better job matches and thus higher productivity
9. Sources of unemployment
• Sectoral shift
• Minimum wage policy
• Unions
• Efficiency wages
Sectoral shift
w S
w1
w2
D1
D2
L2 L1 L
27
04/02/2024
Minimum wage policy/ Unions/ Efficiency wages
w S
• Result:
wm
unemployment L2L
w0
L2 L L1 L
10. The relationship b/w

inflation and unemployment
• The short-run Phillips curve

• The long-run Phillips curve
The short-run Phillips curve
P LRAS
inflation
SRAS (gp)
PC
gp1
gp2
Y u1 u2 u
28
04/02/2024
Evidence for the Phillips Curve?
During the 1960s, U.S.

policymakers opted for
reducing
unemployment
at the expense of
higher inflation
Tỷ lệ lạm phát và tỷ lệ thất nghiệp US, 1948-69

Hình 1 : Laïm phaùt vaø thaát nghieäp Hoa Kyø 1948-1969
10
Tyû leä laïm phaùt(%)
8
Tại US 6
1948-55: tỉ lệ thất 4
nghiệp thấp, tỉ lệ lạm 2
phát cao 0
1956-69: thất nghiệp -2 0 1 2 3 4 5 6 7 8
cao, lạm phát thấp Tyû leä thaát nghieäp(%)
Đường Phillips xây dựng trên những số liệu trên thể hiện
mối quan hệ ngược chiều giữa tỷ lệ lạm phát và tỷ lệ thất
nghiệp.
The long-run Phillips curve
• 1968: Milton Friedman and Edmund Phelps argued that the

tradeoff was temporary.
• Natural-rate hypothesis: the claim that unemployment
eventually returns to its normal or “natural” rate, regardless of
the inflation rate
• Based on the classical dichotomy and the
vertical LRAS curve.
29
04/02/2024
The long-run Phillips curve
In the long run, faster money growth only causes faster inflation.
P inflation
LRAS LRPC
high
P2 infla-
tion
P1 AD2 low
infla-
AD1 tion
Y u-rate
natural rate natural rate of
of output unemployment
Reconciling theory and evidence

• Evidence (from ’60s):
PC slopes downward.
• Theory (Friedman and Phelps’ work):
PC is vertical in the long run.
• To bridge the gap between theory and evidence, Friedman and
Phelps introduced a new variable: expected inflation – a
measure of how much people expect the price level to change.
The Phillips Curve Equation
Natural
Unemp.
= rate of – a Actual – Expected
rate inflation inflation
unemp.
Short run
Fed can reduce u-rate below the natural u-rate
by making inflation greater than expected.
Long run
Expectations catch up to reality,
u-rate goes back to natural u-rate whether inflation is high or
low.
30
04/02/2024
How Expected Inflation Shifts the PC
Initially, expected &

actual inflation = 3%, inflation
unemployment = PCLR
natural rate (6%).
Fed makes inflation B
2% higher than expected, C
5%
u-rate falls to 4%.
3% A
In the long run,
expected inflation increases to PC2
5%, PC1
PC shifts upward,
4% 6% u-rate
unemployment returns to its
natural rate.
The Breakdown of the Phillips Curve

Early 1970s:
unemployment increased,
despite higher inflation.
Friedman & Phelps’
explanation:
expectations were
catching up with reality.
92
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 93
management system for classroom use.
31

Chapter 8 Inflation, Unemployment and Short-Run Trade Off

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 8 Inflation, Unemployment and Short-Run Trade Off

Uploaded by

Copyright:

Available Formats

04/02/2024

CHAPTER Inflation and

• Inflation (Lạm phát)

• Deflation (Giảm phát)

• Disinflation (Giảm lạm phát)

• The consumer price index

The consumer price index

• Consumer price index (CPI)

1. Fix the basket

2. Find the prices

3. Compute the basket’s cost

4. Chose a base year and compute the CPI

CPIt   pit  qi0  100

pit , pi0 price of good i at time ti and time t0

qi0 quantity of good i at time t0

5. Compute the inflation rate

CPI this year−CPI last year

Example: basket: {4 pizzas, 10 lattes}

Compute CPI in each year (2014 base year)?

What’s in the CPI’s basket?

Cơ cấu rổ hàng hóa trong CPI, Vn 2007

9. Văn hóa, thể Nhóm hàng hóa %

Active Learning 2 Substitution bias

Active Learning 2 Answers

Active Learning 2 Answers

Problems with the CPI

Problems with the CPI

Problems with the CPI

Problems with the CPI

CPI vs GDP deflator

CPIt   pit  qi0  100

• Imported consumer goods:

CPI vs GDP deflator

Two Measures of Inflation, 1965–2016

Active Learning 3 CPI vs. GDP deflator

Active Learning 3 Answers

• The quantity theory of money (Lý thuyết khối lượng tiền)

The quantity theory of money

The quantity theory of money

The quantity theory of money

The quantity theory of money

The quantity theory of money

The velocity of money

The velocity of money

• The quantity equation: M x V = P x Y

The velocity of money

• Prices rise when the government prints too much money.

The velocity of money

• Example with one good: pizza. In 2015:

Lessons about the quantity theory of money

• If real GDP is constant,

• Inflation happens because people expect price level to rise over

• People expect price to rise because it usually rises over time.

• Large government budget deficits

Lạm phát ở Việt Nam, 1982-2005

5. The costs of inflation

• The Inflation Tax

The inflation tax

• Revenue the government raises by creating (printing) money

The Fisher Effect

• Principle of monetary neutrality

The Fisher Effect

U.S. Nominal Interest & Inflation Rates, 1960–2016