ECON 10/28 - Alternate Views of Output, Inflation, and Unemployment

Current Events:
- Read Warren Weaver article
- Fed meeting today: talking about cutting rate from 2% to 1%
- Housing sales are up, prices are still going down
- Banks have received a total of 175 billion dollars for purchase of preferred stock to re-capitalize the industry
- Bloomberg.com : good resource for interest and mortgage rates, bond prices and rates, etc.

The Natural Rate of Unemployment:
- Long run unemployment
- Determined by real factors
- Output and employment tend toward an equilibrium in the long run
- Rate of unemployment when the economy is in an long-run equilibrium
- Somewhere between 4 and 5%

Price Expectations and Short-Run Adjustments:
- Workers do not have perfect info about the relationship between their money wage and the real wage
- In the short run, workers base their labor supply decision on expected prices and use an approximation for the real wage, W/Pe
- Unemployment in the short run is based on the expected real wage and may not equal the natural rate

The Phillips Curve:
- In the short run there is an inverse relationship between price inflation and unemployment (Called the Phillips Curve)
- Rising inflation increases demand for workers
- Workers do not demand wage increases equal to the rate of inflation
- Companies can afford to increase employment and the unemployment rate falls

Long Run Adjustment:
- Workers eventually see the entire increase in the general price level
- Labor supply falls when workers recognize the full extent of price inflation
- Employers must raise wages to maintain employment when workers fully appreciate the actual rate of inflation
- Employment falls back to the natural rate once employers pay the full real wage, W/P

Time Varying Natural Rate Varies As:
- Institutions change
- Competition from lower-wage nations increase
- Hysteresis (current values are influenced by past values)