Notes on Inflation and Unemployment

Chapter 32: Extending the Analysis of Aggregate Supply

Key Concepts

• Inflation and Unemployment
  • Low Inflation and Low Unemployment Rates: Major goals of the Federal Reserve (Fed).
  • Compatibility or Conflict: Investigates whether low inflation and low unemployment can coexist or if they cause conflict.
  • Short-Run Tradeoff: There exists a tradeoff between inflation and unemployment in the short run, illustrated by the Phillips Curve.
  • Aggregate Supply Shocks: Events that suddenly increase or decrease costs, leading to higher inflation and unemployment simultaneously.
  • Long-Run Perspective: No tradeoff exists between inflation and unemployment in the long run, implying that attempts to reduce unemployment can result in increased inflation over time.