The Short-Run Trade-Off between Inflation and Unemployment

These flashcards cover key concepts related to the relationship between inflation and unemployment, particularly the Phillips Curve and its implications in both the short-run and long-run economic contexts.

Phillips Curve (PC)

A curve that shows the short-run trade-off between inflation and unemployment.

Natural Rate of Unemployment

The unemployment rate toward which the economy gravitates in the long run, which is not necessarily socially desirable.

Disinflation

A reduction in the inflation rate, often requiring contractionary monetary policy.

Sacrifice Ratio

The percentage points of annual output lost per 1 percentage point reduction in inflation.

Rational Expectations

The theory that people optimally use all available knowledge, including the effects of government policies, in forecasting future events.

Short-Run Phillips Curve

The graphical representation of the inverse relationship between inflation and unemployment that holds in the short run.

Adverse Supply Shock

An event that directly alters firms' costs and prices, shifting the aggregate supply and Phillips curve.

Natural-rate Hypothesis

The theory that the tradeoff between inflation and unemployment is temporary as unemployment returns to its natural rate regardless of inflation.

Expected Inflation

A measure of how much people expect the price level to change, influencing the short-run Phillips curve.

Inflation-Unemployment Trade-off

The relationship where lower unemployment can come at the expense of higher inflation, and vice versa, in the short run.