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Inflation and unemployment: a layperson’s guide to the Phillips curve. Federal Reserve Bank of Richmond Economic Quarterly

By Jeffrey M. Lacker and John A. Weinberg

Abstract

What do you remember from the economics class you took in college? Even if you didn’t take economics, what basic ideas do you think are important for understanding the way markets work? In either case, one thing you might come up with is that when the demand for a good rises—when more and more people want more and more of that good— its price will tend to increase. This basic piece of economic logic helps us understand the phenomena we observe in many specific markets—from the tendency of gasoline prices to rise as the summer sets in and people hit the road on their family vacations, to the tendency for last year’s styles to fall in price as consumers turn to the new fashions. This notion paints a picture of the price of a good moving together in the same direction with its quantity—when people are buying more, its price is rising. Of course supply matters, too, and thinking about variations in supply— goods becoming more or less plentiful or more or less costly to produce— complicates the picture. But in many cases such as the examples above, we might expect movements up and down in demand to happen more frequently than movements in supply. Certainly for goods produced by a stable industry in an environment of little technological change, we would expect that many movements in price and quantity are driven by movements in demand, which would cause price and quantity to move up and down together. Common sense This article first appeared in the Bank’s 2006 Annual Report. The authors are Jeffrey M

Year: 2007
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