Phillips Curve

  • Definition: A curve that shows the short-run trade-off between inflation and unemployment.
  • What It Means:

Natural-Rate Hypothesis

  • Definition: The claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation.
  • What It Means:

Supply Shock

  • Definition: An event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve.
  • What It Means:

Sacrifice Ratio

  • Definition: The number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
  • What It Means:

Rational Expectations

  • Definition: The theory that people optimally use all the information they have, including information about government policies, when forecasting the future.
  • What It Means: