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Lecture 81 Macroeconomic Analysis 2003 Phillips Curve and the Natural Rate of Unemployment Hypothesis.

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Presentation on theme: "Lecture 81 Macroeconomic Analysis 2003 Phillips Curve and the Natural Rate of Unemployment Hypothesis."— Presentation transcript:

1 Lecture 81 Macroeconomic Analysis 2003 Phillips Curve and the Natural Rate of Unemployment Hypothesis

2 Lecture 82 Contents Motivation Review of Inflation and unemployment rates over time Phillips Curve Output GAP: Potential and Actual Output Wage Price Spiral Expectation Augmented Phillips curve Some exercises

3 Lecture 83 Measurement and Analysis of Fluctuations in the Economy

4 Lecture 84 Unemployment and Inflation Current unemployment rate: Headline inflation – RPI (Dec) 2.9%, up from 2.6 % the previous month Underlying inflation – RPIX (Dec) 2.7%, down from 2.8% the previous month HICP inflation (Dec)1.7%, up from 1.6% the previous month Producer output prices (Jan nsa) 1.6%, up from 1.3% - revised in the previous month Producer input prices (Jan nsa) 3.6%, up from 2.8% - revised the previous month Halifax house prices (Jan)Down 1.5% on Dec and up 22.5% on a year earlier Current Inflation Rates from the Treasury Web page

5 Lecture 85

6 6 Thatcher contraction 92 recession Beginning of Stagflation Brown and New Labour independent MPC

7 Lecture 87

8 8

9 9

10 10 Oil price shock Breakdown of Bretton Woods Inflation targeting Independent central Bank

11 Lecture 811 Source: Office of the Deputy Prime Minister Average dwelling prices: by type of buyer in the UK (in thousands £)

12 Lecture 812 Refer for the current priceswww.halifax.co.uk

13 Lecture 813

14 Lecture 814

15 Lecture 815

16 Lecture 816

17 Lecture 817 Premium unleaded petrol 1 prices: EU comparison, mid-June 2002 ( Pence per Litter) Source: Department of Trade and Industry

18 Lecture 818

19 Lecture 819

20 Lecture 820

21 Lecture 821 Phillips Curve

22 Lecture 822 Inflation rate Unemployment Rate, u Deflation Policy Menu Phillips Curve: Unemployment Inflation Trade-Off 6

23 Lecture 823 LF=29.3 LS=LD u=10% u = 5.1% LD LS 0 LD0 In Millions Total Labour Force and Unemployment Rate in the UK in February 2003 Pay rise by modernisation or bargaining?

24 Lecture 824 Labour Demand Labour Supply LS w u w u LF LD1 LD2 Labour Demand, Labour Supply and Unemployment

25 Lecture 825 Price Level Output Gap AS AD0 AD1 AD2 AD3 a b c AD4 Y0Y1 Y3Yc Aggregate Demand, Productive Capacity and the Price Level Higher Wage Rate Translates into Higher Prices P1 P3 P5 P4 Keynesian New Classical New Keynesian part

26 Lecture 826 Phillips Curve and Expectation Augmented PC (NAIRU)

27 Lecture 827

28 Lecture 828

29 Lecture 829 Expectation Augmented Phillips Curve b =1

30 Lecture 830 Time Rational Expectation Inflation Deflation Expectation die very slowly.

31 Lecture 831 b =1 Unemp. rateInflation Inflation and Unemployment with Static Expectation

32 Lecture 832 Grate g n =5 g n =4 g n =7 Link Between Unemployment and Inflation

33 Lecture 833 Evidence of the Phillips Curve in the UK

34 Lecture 834 Wage Price Spiral: Modernisation or Negotiation?

35 Lecture 835 Price Level to Inflation Rate

36 Lecture 836 Inflation to Aggregate Supply or Expectation Augmented Phillips Curve

37 Lecture 837 o LAS Inflation, Output and Unemployment in the Short Run

38 Lecture 838 AS=f(w,p e ) o LAS Inflation, Output and Unemployment in the Short Run AD =f(M,G, T)

39 Lecture 839 Unemployment rate Real Wage Firms set price Unions set wage rate Z includes Tax Benefit Reservation wage Bargaining power Minimum wage Structure of labour market Wage Setting and Price Setting Un

40 Lecture 840 Derivation of aggregate supply curve for the economy using price setting and wage setting relations

41 Lecture 841 A natural rate of unemployment is obtained by intersection of price setting and wage setting relations

42 Lecture 842 Friedman (1966, 1968) and Phelps (1967) natural rate of unemployment hypothesis

43 Lecture 843 Natural Rate of Unemployment Hypothesis

44 Lecture 844 P Y Yn AD0 AD1 LAS SAS a b c 0 Reply to demand shock Adaptive Expectation: a to b to c Rational expectation: a to c Adaptive and Rational Expectation Views on a Positive Demand Shock P0 P2 P1

45 Lecture 845 Inflation is a Monetary Phenomenon

46 Lecture 846 Exercise Should wage rises of workers (fire fighters) come from modernisation of services as suggested by the government or by the negotiation between the unions and the government? Natural rate of unemployment and price and wage bargaining Aggregate supply


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