Page 374 - Krugmans Economics for AP Text Book_Neat

figure 34.1

Unemployment and Inflation, Inflation
rate
1955–1968
5%
Each dot shows the average U.S. unemployment
rate for one year and the percentage increase in 4 1968
the consumer price index over the subsequent
year. Data like this lay behind the initial concept 3 1967 1957
of the Phillips curve. 1958
1966 1964
Source: Bureau of Labor Statistics. 2 1965 1960
1956
1 1963 1961
1962
1959
0
1955
–1
3 4 5 6 7 8%
Unemployment rate

Even at the time, however, some economists argued that a more accurate short -
run Phillips curve would include other factors. Previously, we discussed the effect
of supply shocks, such as sudden changes in the price of oil, that shift the short - run
aggregate supply curve. Such shocks also shift the short - run Phillips curve: surging
oil prices were an important factor in the inflation of the 1970s and also played
an important role in the acceleration of inflation in 2007–2008. In general, a nega-
tive supply shock shifts SRPC up, as the inflation rate increases for every level of
the unemployment rate, and a positive supply shock shifts it down as the inflation
rate falls for every level of the unemployment rate. Both outcomes are shown in
Figure 34.3.
But supply shocks are not the only factors that can change the inflation rate. In
the early 1960s, Americans had little experience with inflation as inflation rates had
been low for decades. But by the late 1960s, after inflation had been steadily increas-
ing for a number of years, Americans had come to expect future inflation. In 1968

figure 34.2

The Short -Run Phillips Curve Inflation
rate
The short -run Phillips curve, SRPC, slopes
downward because the relationship between
the unemployment rate and the inflation rate
is negative.
When the unemployment
rate is low, inflation is high.

0

When the unemployment
rate is high, inflation is low. Short-run Phillips
curve, SRPC

Unemployment rate

332 section 6 Inflation, Unemployment, and Stabilization Policies