The Friedman Curve

This section uses concepts from Chapter 26 on "Aggregate Supply."

Now let's look at the Friedman Curve in more detail.

Suppose

• Prices have been stable for a long time, so there are no inflationary expectations. People expect the rate of inflation to be zero.
• Output is at potential output, and unemployment at the NAIRU, this year.
• Potential output is growing at a rate of 3%, the sum of the growth rate of productivity and of the labor force.

Then we will have a Friedman Curve like Figure 9:

Figure 9. Friedman Curve Without Inflationary Expectations

Here is the reasoning.

• If output grows along with Potential Output at 3%, unemployment will remain constant at the NAIRU, and inflation will remain at a zero rate.
• If output grows at a greater rate, unemployment will fall below the NAIRU, and inflation will accelerate into a positive range.
• If output grows at a smaller rate, then unemployment will rise above the NAIRU, and inflation will drop to a negative rate (deflation).

Inflationary Expectations

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