[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

16
14
INFLATION RATE (%)
12
10
8
6
1960–1969, 1984–2003
1974–1983
4
2
0
2 3 4 5 6 7 8 9 10
UNEMPLOYMENT RATE (%)
Figure 37.4
THE PHILLIPS CURVE FOR THE
UNITED STATES
The figure depicts the Phillips curve relationship for the United States during different
periods. Notice that the Phillips curve has shifted over time.
SOURCE: Economic Report of the President (2004).
tight, and wages rise more rapidly. It is the rate of cyclical unemployment,
not the total level of unemployment, that best measures the
inflationary pressures in the economy.
In Chapter 31, we combined the aggregate demand–inflation (ADI)
curve with an inflation adjustment (IA) line. We drew the IA line as a
horizontal line at the economy’s current rate of inflation. If equilibrium
output rose above or fell below full-employment output, we shifted
the IA line to reflect the changes in inflation over time. The horizontal
IA line provided a starting point for understanding how fluctuations
in the economy can cause inflation to rise or fall. Now we can
use our knowledge of the Phillips curve to elaborate on the relationship
between output and inflation. As output expands and unemployment
falls below the natural rate, inflation will rise. The resulting
relationship between output and inflation is called the short-run inflation
adjustment (SRIA) curve. It is shown as the green line in Figure
37.5. In the figure, Y f is the economy’s potential level of output. If actual
output rises above potential, say to Y 1 , unemployment falls below the
natural rate and wages rise more rapidly. Higher wages increase the
costs of production for firms, and prices rise more rapidly. Because
the inflation rate increases to π 1 , the short-run inflation adjustment
curve in Figure 37.5 is drawn with a positive slope, rather than as a
horizontal line.
INFLATION (π)
π 1
π 0
Y f
Y 1
OUTPUT (Y )
Short-run
inflation
adjustment
curve
Figure 37.5
THE INFLATION ADJUSTMENT CURVE
Increases in output above potential lead to higher inflation.
Y f is potential output. If the economy expands
from Y f to Y 1 , inflation rises from π 0 to π 1 . The expansion
in output causes unemployment to fall below the
natural rate. The result is that wages increase faster, and
inflation rises.
SHORT-RUN INFLATION ADJUSTMENT ∂ 823