1. Causes and Consequences of Inflation
Unit 13.3

2. Inflation Inflation Inflation Rate Consumer Price Index (CPI)
Producer Price Index (PPI)
Hyperinflation
Deflation

4. Causes of Inflation Quantity Theory Demand-Pull Inflation
Cost-Push Inflation
Wage-Price Spiral

5. Impacts of Inflation Decreasing value of dollar
Interest rates rise to stay ahead of inflation
Decreased real return on savings

6. The Phillips Curve Inflation Rate (percent Phillips curve per year) 4B 6 7 A 2
Unemployment
Rate (percent)

7. How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply
(a) The Model of Aggregate Demand and Aggregate Supply
(b) The Phillips Curve
Price
Inflation
Level
Short-run
aggregate
supply
High
aggregate demand
Rate
(percent
Phillips curve
per year)
Low aggregate
demand
(output is
8,000) B 4 6
8,000
(unemployment
is 4%)
106 B
(unemployment
is 7%)
7,500
102 A
(output is
7,500) A 7 2
Quantity
Unemployment
of Output
Rate (percent)

8. The Long-Run Phillips Curve
Inflation
Rate
Long-run
Phillips curve B
High
inflation
1. When the
Fed increases
the growth rate
of the money
supply, the
rate of inflation
increases . . .
but unemployment
remains at its natural rate
in the long run.
Low
inflation A
Natural rate of
Unemployment
unemployment
Rate

9. How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply
(a) The Model of Aggregate Demand and Aggregate Supply
(b) The Phillips Curve
Price
Long-run aggregate
Inflation
Long-run Phillips
Level
Rate
supply
curve
1. An increase in
the money supply
increases aggregate
demand . . .
and
increases the
inflation rate . . .
AD2 P2 B B
raises
the price
level . . . A P A
Aggregate
demand, AD
Natural rate
Quantity
Natural rate of
Unemployment
of output
of Output
unemployment
Rate
but leaves output and unemployment
at their natural rates.

10. The Phillips Curve in the 1960s
Inflation Rate
(percent per year) 10 8 6
1968 4
1966
1967 2
1965
1962
1964
1961
1963 1 2 3 4 5 6 7 8 9 10
Unemployment
Rate (percent)

11. The Breakdown of the Phillips Curve
Inflation Rate
(percent per year) 10 8 6
1973
1970
1971
1969 4
1968
1972
1966
1967 2
1965
1962
1964
1961
1963 1 2 3 4 5 6 7 8 9 10
Unemployment
Rate (percent)

12. The Supply Shocks of the 1970s
Inflation Rate
(percent per year) 10
1981
1980
1975
1974
1979 8
1978 6
1977
1976
1973 4
1972 2 1 2 3 4 5 6 7 8 9 10
Unemployment
Rate (percent)

13. The Volcker Disinflation
Inflation Rate
(percent per year) 10
1980
1981
1979 A 8
1982 6
1984
1983 B 4
1987 C
1985
1986 2 1 2 3 4 5 6 7 8 9 10
Unemployment
Rate (percent)

14. The Greenspan Era 10 8 6 4 2 1 2 3 4 5 6 7 8 9 10 Inflation Rate
(percent per year) 10 8 6
1990 4
1991
1989
1984
1988
1985
1987
2001
1995
2000
1992
1993 2
1994
1986
1997
1996
1999
1998
2002 1 2 3 4 5 6 7 8 9 10
Unemployment
Rate (percent)