Today we will learn about the natural rate hypothesis and the effects of supply-shocks like those experienced in the 1970's on the Phillips Curve. You should have read the text chapter identified below in the homework section and watched the related videos. We will start class today with you working cooperatively with a partner to find a solution to the "Problem of the Day" and then there will be a lecture on our next topic. This page contains all the information you need for today's class: homework, the problem of the day, helpful resources (videos, podcasts, etc.) and an explanation of the activities we will do in class. Use the table of contents on the right to help you navigate.
Read Mankiw Chapter 35 ("Shifts in the Phillips Curve: The Role of Supply Shocks section" section) and watch the following videos.
Khan Academy
Problem of the Day
Define the following terms: Phillips Curve, unemployment, and inflation.
Draw the long-run tradeoff and the short-run tradeoff between unemployment and inflation on one graph.
Suppose the natural rate of unemployment is 6%. On one graph, draw two Phillips curves that describe the four situations listed here.
a. Actual inflation is 5 percent and expected inflation is 3 percent.
b. Actual inflation is 3 percent and expected inflation is 5 percent.
c. Actual inflation is 5 percent and expected inflation is 5 percent.
d. Actual inflation is 3 percent and expected inflation is 3 percent.
Lecture
The Phillips Curve and Supply Shocks and The Natural Rate Hypothesis and the Costs of Reducing Inflation