Q1). Phillips curve indicates the relationship between unemployment rate and inflation rate.
In a closed economy, once expansionary fiscal policy had been chosen, government has power to adjust between unemployment rate and inflation in a short term run, which to be reconciled at a equilibrium point to make sure the national income reaches a maximum level, and at this point, either inflation or unemployment rate stays in a comparable low level; in the long term run, government would lose its power to dominate the price level, which will mean a losing market control power. As a result, stagflation occurs, and the curve will be more and more close to a vertical line. At this point, aggregated supply become relatively stable since the price moved back to the equilibrium point, and only the inflation rate remains, it will lead to a unemployment rate
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NRU- Natural Rate of Unemployment The substitution of Phillips curve about the relationship between inflation and unemployment existed only in the short term. Due to the understanding of the general level of prices in the short term that the cost is exorbitant, in which case, "money illusion" exists which workers would believe that nominal wages rose was real wages increase and supply increased consequently, as a result, employers wrongly believed that he could increase the output based on prices risen, thereby increasing workers employed, which ignored the price level increased as well. In the long term, workers and employers will adjust expectations, making the expected inflation rate is equal to the real inflation rate. At this point, the negative slope in Phillips curve no longer exist, there are only a vertical Phillips curve. It means that unemployment is no longer affected by inflation policy. 3. Friedman had admitted the negative slope of Phillips curve in short term run, but it is temporarily effective, which the government would like to lower the unemployment rate, they must apply to the higher inflation
But as we know, there is always going to be one or the other. The reason that an economy is thrown out of equilibrium in the first place is a result of consumer spending habits. If these habits are changed, there is a result is one of two things. If consumers increase there spending habits, an inflationary gap occurs. At the opposite end of the spectrum, if consumers were to reduce their spending, the result is a recessionary gap. Inflation occurs when the economy is growing uncontrollably fast as a result of consumer spending. This rapid rate of inflation happens when consumers are spending money due to increases in income. When consumers spend more, this increases the overall price level, which therefore leads to a further increase in income. This cycle is what leads to over-inflation. One of two things can be done when an economy is experiencing an economic gap, whether it is above or below the trend line. Option one is to do nothing about it and let the problem work itself out. The problem with this method is that in order for a recession to work itself out without government assistance, this requires that workers take pay cuts – something that a very low percentage of people are accepting of simply due to the personal
First, I will discuss the time period between 1973-1974. Because the unemployment and inflation rates are higher than normal, we can assume that the aggregate-demand curve is downward-sloping. When the aggregate-demand curve is downward-sloping, we know that the economy’s demand has slowed down. When the economy’s demand has slowed down, businesses have to choice but to raise prices and lay off workers in order to preserve profits. When employers throughout the country respond to their decrease in demand the same way, unemployment increases.
In Keynesianism, government uses fiscal policy, which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high, and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the amount of income that goes to financial responsibilities. When people have more money, they are able to spend more, which in return goes into jump starting the economy.
The Classical economists believe that these are “temporary” changes that will correct themselves in the long run. They feel that an economy will always tend towards operating at its potential output (as given by the long-run aggregate supply curve. Nothing needs to be done by the government because normal market forces will serve to self-correct these issues. On the other hand, Keynesian economics argue that the gap between the lower and the potential levels of output is due to a change in aggregate demand. They argue that this gap can exist for a long time and that the gap can be pushed to close faster if the government enacts fiscal and monetary policies. There are differences in how each policy works to close the recessionary gap caused by a drop in aggregate
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
In chapter nine ‘Why is there an employment/inflation trade-off?’ the authors critique the natural rate theory. They agree with the fact that wage setting is influenced by expectations of inflation but disagree that inflationary expectation affects ‘wage and price setting one for one’
A titration curve is a plot of pH of the analyte solution versus volume of titrant added, as the titration progresses. 9,12 The equivalence point is the inflection point of a titration curve.9
The Fed desires to maintain high employment because the condition of high unemployment, the alternative, creates idle workers and idle resources. This leads to closed factories, unused equipment and materials, ultimately decreasing our GDP. Now, let me further explain that the goal for high unemployment is not an unemployment level of zero, rather a level above zero where labor demand equals labor supply. This is known as the ‘natural rate of unemployment’.
The movie The Thin Blue Line is an interesting film that centers on the murder of a police officer and the man who was convicted of this crime that he did not commit. This film dives into the details of this murder and how the man was wrongly convicted for this crime. Randall Adams and David Harris were the suspects in questions, when a Dallas police officer, Robert Wood, was shot by someone in the car. Adams was convicted of the murder despite the evidence against Harris as the shooter. The film centers around the interviews of the people involved or familiar with the case to recount the events of that night that the crime took place.
There is a close relationship between Gross Domestic Product (GDP) and the unemployment rate as it will relate to the decrease or increase of inflation rate. The inflation rate will increase when GDP and unemployment decreases, because it will affect the purchasing power of the people of a particular country.
avid Brooks describes paracosms as detailed imaginary worlds that encompasses landscapes, imaginary beasts, heroes and laws, characters we idolize that help people orient themselves into reality (NY Times). When Brooks followed Springsteen across France and Spain, he noticed something as he attended the Springsteen concerts in Europe. He used his observations to highlight a significant theme that he believed was central to Springsteen’s fame outside of America. He concluded that it was Springsteen’s method about holding close his core orientation and history that was always represented in his music. One instance in Madrid caught Brooks’ attention.
There exists a clear relationship between unemployment and inflation. These two important terms of the economy are inversely related to each other. This relation posts an intuitive sense among the economists. A.W. Philips first reported the tradeoff between unemployment and inflation, it has been called after him as Philips curve. The simple logic between this is that workers will be needed to push for higher wages as unemployment increases. Philips curve suggest that it is not possible to maintain both the factors at same level. If one of the factor increases then the other would certainly decrease.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
The unemployment rate, which is the percentage of the labour force that is unemployed, is usually used to measure unemployment (Mankiw 1992). The debate on the relationship between inflation and unemployment is mainly based on the famous “Phillips Curve”. This curve was first discovered by a New Zealand-born economist called Allan William Phillips. In 1958, A. W. Phillips published an article “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957”, in which he showed a negative correlation between inflation and unemployment (Phillips 1958). As shown in figure 1, when unemployment rate is low, the inflation rate tends to be high, and when unemployment is high, the inflation rate tends to be low, even if it is negative.
As a result of this economic growth families will begin to feel more confident and will begin to spend more of their money instead of saving it because they believe that will receive a pay raise or will find a better job. (Amadeo, 2016) Borrowing also increases when economic activity is high people begin to borrow from banks and other places because they feel that the government has been doing a great job managing the economy. (Amadeo, 2016) As we have seen in 2008 people should never get to confident in the economy because our economic bubbles are used to crashing when they are doing very well and it’s never really the people’s fault it’s the governments. Although inflation begins to rise when the economy is doing great one of the things that is known to bring prices down is competition among businesses. Competition is great because one company will attempt to sell a product for a cheaper price than another company which results in lower prices the same as you see with cell phones and automobiles. Higher prices can also be caused by technological innovations when people are expecting a new product the producer can sell it for a higher price because they know that consumers will spend almost any amont of money to obtain that product. (Amadeo, 2016) Higher demand for new products will increase employment to meet those demands and inflation will rise which will benefit the economy tremendously. Whenever the price level increases, spending must also increase to be able to buy the same amount of goods and