The data points in the graph represent combinations of inflation and unemployment for 1961 through 1969. The combinations of inflation and employment for 1948 through 1969 coincide very closely with the inflation-unemployment data points for 1961 through 1969. Because it is not practical to show all these points on this graph, let's consider the 1961-1969 points as representative of the entire set of 1948-1969 points.

As of 1969, policymakers appeared to have an easy job.

  1. What was the relationship between inflation and unemployment in the U.S. from 1948-1969 ?
  2. If policy makers wanted to lower unemployment, what was cost of doing so ?

From the textbook, you learned that the Phillips curve can be represented by the following (textbook equation 8.1):

Phillips curve: pt = p te + (m + z) - a ut

where pt is actual inflation, pte is expected inflation, m is the average markup firms use over costs to set prices, z is an index of labor market conditions, and ut is the actual unemployment rate.

Here, inflation is positively affected by expected inflation, the firm's markup over costs, and labor market conditions, and inflation is negatively affected by unemployment.

  1. Since the Phillips curve was fairly stable from 1948-1969 (the slope and intercept does not appear to have changed), what does this imply about expected inflation from 1948-1969 ?

Milton Friedman warned that the stable Phillips curve would not last. He said that as expectations changed regarding what future inflation would be, the Phillips curve would move. Click on the 1970-1998 button.

  1. Was the original 1948-1969 Phillips curve able to describe the relationship between inflation and unemployment from 1970-1998 ?
  2. The United States experienced much higher inflation rates in the 1970s than in the 1948-1969 period. How might this have affected the position of the Phillips curve ?
  3. The United States experienced lower inflation rates in the 1980s and 1990s than in the 1970s. How might this have affected the Phillips curve ?
  4. Given your answers to questions 5 and 6, can you explain what happened to the Phillips curve after 1970 ?