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Week 12 · Module overview

Week 12 — Inflation, the Phillips Curve & Expectations

Principles of Macroeconomics Free sample edition

Why this matters

A restaurant worker deciding how big a raise to ask for and a small-business owner setting next year's prices both feel this week's ideas.

In plain language

This week asks whether a country can buy fewer jobless people by putting up with faster-rising prices. In the short run, the answer often looks like yes: when jobs are plentiful, pay and prices tend to climb faster. That pattern is the short-run Phillips curve (a picture of the link between the unemployment rate and the inflation rate). The catch is expected inflation (the price increases people plan for), because once people expect faster price rises, the deal fades. You will also meet a simple money equation that explains why, over many years, more money mostly means higher prices rather than more goods.

  • Already covered: Week 3 measured inflation and unemployment, and Weeks 9 to 11 built the money supply and traced it to output.
  • This week: the short-run and long-run Phillips curves, expected inflation, and the quantity equation.
  • How they connect: this week asks what is left of the short-run boost from money once expectations catch up.
  • Where we're going next: Week 13 opens the open-economy unit with trade.

Focus

Can lower unemployment be bought with higher inflation, and does the deal last?

By the end of this module, you should be able to:

  • [ ] read the short-run Phillips curve and state its trade-off forwards
  • [ ] explain why expected inflation shifts the curve and the long run is vertical
  • [ ] use M × V = P × Q to find the price level and show neutrality

To-do

Plan your week

  1. Read Chapter 12 (45 minutes), then the lecture and slides.
  2. Work the tutorial (60–90 minutes) and practice set (20 minutes).
  3. Do the Model Workshop (90 minutes), discussion, and assignment.
  4. Take the quiz.

This week's checkpoint: explain why holding unemployment below the natural rate ends with higher inflation and the same unemployment.

You've got this

Take it in order, and ask your instructor early.

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