Macro Economics Project

Macro Economics Project - Phillip Curve: The Phillip Curve...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Phillip Curve: The Phillip Curve says that there is a historical inverse relationship between the unemployment rate and inflation rate in the economy. It means that higher inflation rate in the economy tends to generate lower unemployment rate and vice versa lower inflation rate in the economy can cause higher unemployment rate. Phillip Curve suggests following short-term tradeoff between unemployment rate and the rate of inflation: The labor market: When unemployment falls it may create labor shortage in the economy which may result in shortage of skilled labor supply. This situation may put pressure on wages rates to rise and due to that prices may rise in the economy. Other factor markets: Cost-put inflation can be a result of increase in demand of commodities like oil, copper, goods which increases the inflationary pressure on the economy. Product market : Increase in demand and output encourage the suppliers to raise their prices to earn more profit. Phillips Curve takes the modified form, which considers inflationary expectations, which remain influential. With some type of variation, this theory goes under several names, but all modern versions of this theory distinguish between short-run and long run effects on the unemployment. The "expectations-augmented Phillips curve" is referred as the “short-run Phillips curve" because it shifts up when inflationary expectations rise. Theory suggests that in the long run, monetary policy cannot affect unemployment, which adjusts back to its "natural rate". The ability of the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
monetary authority temporarily decreases unemployment by increasing permanent inflation, and vice versa. This long-run "neutrality" of monetary policy does allow for short run fluctuations. The Phillips curve shows that there is a trade-off between inflation rate and unemployment rate
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/03/2011 for the course ECON 101 taught by Professor Hughes during the Spring '11 term at Ashford University.

Page1 / 6

Macro Economics Project - Phillip Curve: The Phillip Curve...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online