(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
In this question we are going to explore the role inflationary expectations play in determining a country's ability to sustain unemployment rates different than the natural rate of unemployment.
(Description)
Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. In a country such as Japan, which has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to be reflected in a corresponding change in the expected inflation rate. In contrast, in a country such as Zimbabwe, which has recently had very high inflation, a change in the actual inflation rate will immediately be reflected in a corresponding change in the expected inflation rate.
(Speaker)
The Phillips curve shows the negative relationship between the inflation rate and unemployment rate.
(Description)
On the Figure there is a Phillips curve. The horizontal axis corresponds to unemployment rate. The vertical axis corresponds to the inflation rate. The straight line SRPC with a negative slope crossing the unemployment rate axis is plotted in the first and the fourth quadrants.
(Speaker)
The point where the expected inflation rate is zero percent, the intersection of the short-run Phillips curve and the x-axis, defines the non-accelerating inflation rate of the unemployment, or the NAIRU.
(Description)
The intersection point of Phillips curve and x-axis is labeled as: Nonaccelerating inflation rate of unemployment, NAIRU.
(Speaker)
The slope of the Philips curve is determined by the speed at which people revise their inflationary expectations. Countries such as Japan will find that they can sustain an unemployment rate lower than the NAIRU for longer periods of time before the expected rate of inflation increases. If inflationary expectations adjust slowly, the short-run Phillips curve will be relatively flat.
(Description)
On the Figure there is a new Phillips curve with flatter slope SRPC sub Japan. The straight line SRPC sub Japan with a negative slope crossing the unemployment rate axis is plotted in the first and the fourth quadrants.
(Speaker)
In contrast, Zimbabwe will find that its short-run Phillips curve is practically vertical because people are primed to quickly revise their inflationary expectations.
(Description)
On the Figure there are two Phillips curves with and is for Japan with flatter slope and one is for Zimbabwe with almost vertical slope. The straight lines SRPC sub Japan and SRPC sub Zimbabwe with a negative slope crossing the unemployment rate axis in the same point are plotted in the first and the fourth quadrants.
(Speaker)
An unemployment rate below the NAIRU will quickly cause an acceleration of inflation.