Models Of The Phillips Curve Vs Aggregate Supply Relationship Based On Flexible Wages

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

Galbraith mentions that the United States has not experienced wage-led inflation since the 1950s, while the main factors that accelerated inflation were oil production, or dollar devaluation. Another interesting question is bought up “Why are no general equilibrium theorists proposing the NAIROP (natural rate of oil production) or the NAIRODD (natural rate of dollar devaluation). According to the old Phillips curve model, if real wage has been stable or falling, can we conclude that the economy has always been above the NAIRU, and the inflation rate should have been falling as a result? (But it actually did not, because of other mentioned

The police procedural TV series, Crime Scene Investigation (CSI), had episodes where a case unravels to reveal more than one case; intersecting each other. The suspect in one murder can be a victim in another. The chains of the relationship become a sophisticated network I find engrossing. The inverse interaction between inflation and unemployment as delineated in the Keynesian Phillips curve has proven a rise in one variable can lead to a fall in another in the short run. However, the Monetarist’s expectations augmented-Phillips curve suggested the two variables are always spiraling upwards in the long run. The elements operate dependently because a change in inflation will eventually affect employment and vice versa. In order to reduce both unemployment and inflation but still have positive economic growth that is when Aggregate Supply comes in and intervenes.

Two economic models of thought are classical and Keynesian models. Each model takes a diverse approach to the economic education of financial policy, buyer behavior, and government spending. The classical model, which traces its origins to the 1770s, was the first systematic attempt to explain the determinants of the price level and the national levels of real GDP, employment, consumption, savings, and investments. Classical economist Adam Smith and others assumed that all wages and prices were flexible and that competitive markets existed throughout the economy. Classical economic theory is fixed in the theory of an (no government) unrestrictive economic market. This model especially its focus toward macroeconomics relies on four major assumptions: pure competition exists, wages and prices are flexible, people are motivated by self-interest, and people cannot be fooled by money illusion.

At the height of the Phillips curve’s popularity as a guide to policy, Edmund Phelps and Milton Friedman independently challenged its theoretical underpinnings. They argued that well-informed, rational employers and workers would pay attention only to real wages—the inflation-adjusted purchasing power of money wages. In their view, real wages would adjust to make the supply of labor equal to the demand for labor, and the unemployment rate would then stand at a level uniquely associated with that real wage—the “natural rate” of unemployment.

The relationship between inflation and unemployment is a topic, which has been debated by economists for decades. It is this debate that has made the opinions about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing.

The purpose of this analysis is to test for aggregation bias in the United States Personal Consumption Expenditure (PCE). This paper uses first and second generation panel unit root testsfootnote{For more information see Hurlin (2007). } on the National Income and Product Accounts (NIPA) that make up the PCE. Second generation tests differ from first generation tests in that the latter drop the assumption of cross sectional independence the error term. Aggregation bias exists if NIPA inflation differentials converge or diverge at different levels of aggregation. An inflation differential is the difference between inflation rates in one sector and the inflation rate in another sector. Higher levels of aggregation are made to represent the lower, more dis-aggregate levels. If aggregates properly represent the underlying data then each level should converge or diverge the same. Aggregation is important because the process used to aggregate the data may remove information from the data and create divergent inflation differentials when dis-aggregate inflation rates converge. Monetary policy of the Federal Open Market Committee (FOMC) is based on a target inflation rate, however there are concerns that if the FOMC focus 's on aggregate inflation it may cause individual sectors to diverge. Clark (2006) uses dis-aggregate quarterly NIPA accounts to study the distribution of inflation persistence across consumption sectors. Inflation persistence is the tendency of inflation to

Aggregate demand and aggregate supply model is considering about the economy as a whole and used to explain how national income is determined. (economicsonline, 2016) Aggregate demand is the total demand for the economy scarce resources at a given price level and in a given period of time. It includes export(I), government spending(G), investment(X), some of consumer spending and less imports from aboard(M). The formula is AD= C+I+G+X-M. (economicsonline, 2016) Apart from imports, AD is related with price, so, C, I G and X are have different elasticity with the general level of prices. As shown below, in the short run, if price level decrease, GDP will expand, if price level increase, GDP will contract. The reasons lead to aggregate demand

To understand wage differences across different occupations it is important to understand how labor supply and labor demand is derived. This relationship is important because wages are a huge influence for the people choosing a career. Although important in the decision process, wages are not the only thing that workers look at. If wages were the only factor then workers would gravitate to the careers with higher wages until equilibrium is met. Other factors in choosing a career include riskiness, preference, education and future events. This paper is intended to explain how wages, labor demand and labor supply is derived and how these relationships are relative to workers picking a career.

The equilibrium wage rate could be calculated when the quantity supplied equals the quantity demanded.

In the 70’s Friedman developed his theory of inflation on the correlation of inflation and unemployment on the basis of a critical analysis of the (Keynesian) Phillip’s curve. The key elements in the examination of the mutual links between the inflation process and the situation in the labor market are in his construct a natural rate of unemployment, (adaptive) expectations of inflation, as well as a

Time is a crucial factor while studying a worker’s supply curve for labour. Each one of us has only 24 hours in a day which can be used either for working or for leisure (sleeping, eating, watching TV, etc). Another way to look at the leisure is: any duration of the day when a person is not working, he will not be paid by his employer. Human beings would prefer to spend more time in leisure and less time in work, but at the same time, we need to work as well, so that we may earn money to meet expenses of everyday need (services and goods). The money that we earn is dependent on our wage rate and the number of hours we work. When we earn more money, we can buy more services and

Parkin (2012: 522) described inflation as “a persistently rising price level” and price level as “the average level of prices, and the value of money”. A price increase would cause people to buy less, and a decrease in demand for products would cause prices to fall. Parkin (2012) said that expected inflation is promoting a healthy and a strong

This paper looks at the issue of inflation control as an objective of central banks. Viewing the British Commonwealth and Continental European models of ‘zero inflation’ in contrast with the moderate inflation policy of the US provides a case against zero inflation as a policy objective. A variety of issues that surround inflation; e.g., the inflation/unemployment relationship, etc, will be brought to the fore. In the final analysis, it is clear that efforts to eradicate inflation are misguided and more moderate inflation is preferable in an era where steady economic growth is desirable.