Phillips Curve : A Relationship Between The Inflation Rate And The Unemployment Rate Essay

In any economy, no matter whether it is controlled by the government or by free markets, people need to work in order to support it. The government does not generate tax revenue by magic. There have to be people in that economy earning an income to ensure that the government continues to collect taxes. In a free market economy, the same applies because there are some services which only an organized government can supply (such as protection from extra-national threats), but there also those which the people get for themselves because of the working of the markets. In any scenario, unemployment is, at the very least, a drag on the economy, and it can be much worse. This paper examines how the unemployment rate in the United States is underreported, and how that fact effects the sluggishness of the present economy.

In the midst of World War II, bread could be purchased for around $0.10, less than $1,000 for a brand new car, and a nice middle class house would sell for around $4,000 - $6,000. However, in our current day we all know these items, along with everything else, cost much more today than they did during the second world war, a substantially greater amount. This shows that we experienced a noteworthy amount of inflation since the war. Shortly thereafter, in the mid-to-late 1970s, inflation skyrocketed to double-digit levels, which threw America into hysteria. Ever since, the general publics anxiety dwindled along with inflation rates, but the same public is still timid when it comes in regard to inflation, even though we have recently experienced minimal levels over the past few years. Even though most everyone knows that prices go up over time, they still do not fully understand the forces behind inflation. Hopefully some of the uncertainties are clarified in the following paper. Inflation, along with purchasing power, is depicted and elucidated in terms with how the two are congruent to one another. Also, this paper notes how measurements are taken to predict future interest rates, which helps everyone from consumers to producers, so they can be prepared for the change in value of their dollar.

Contractionary monetary policies lead to a leftward shift in the aggregate demand curve. This tells you an increase in interest rates will cause a leftward shift in Aggregate demand, which leads to price level and output decreasing. Since price level is decreasing employment, which is directly related to price level, is decreasing also. In addition, this means unemployment will rise and inflation will fall. These changes are represented on the aggregate demand and Supply curve (Graph 8) and the Phillips curve when the leftward shift in AD because a movement along the Phillips curve (Graph

Inflation is an increase in the average overall price for goods or services while deflation is the decrease of average overall price for goods and services. Inflation always produces the effect of reducing the value of money and reduces the value of future monetary obligations. Reducing the value of money means a consumer has less money to buy services or goods. Reducing the value of future monetary obligations means investing or lending becomes more restricted as the value of return will be less than the amount paid back. Economist Arthur Okun analyzed the relationship between Unemployment and the GDP statistical. Okun’s law simply states that with rising unemployment there is a relationship of slow growth. Unemployment is a person looking for work and unable to find work. Deflation is the value of any amount of money rises. Deflation makes borrowers less likely to borrow because the value of the money they have to pay back will raise.

It helps policy makers to assess the different outcomes and make policy changes based on the information from the Philips curve. There are two types of Phillips curves. One is the short-run Phillips curve, which shows the inverse relationship between inflation and unemployment rates. The second is the long-run Phillips curve, which is the straight line that shows the opportunity cost of inflation and unemployment. However, opportunity cost means gain and loss inflation and unemployment are not related in the long run Phillips curve. Many economists argue on whether the Phillips curve is stable or

When is the last time we experienced deflation (prices actually dropped- you will have to go back a few decades)?

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

Why is inflation bad for the American economy? Imagine going into the popular local food market or gas station several times a week. After a couple of weeks, imagine going into these stores and noticing the prices have steadily increased over the past few months. This is called inflation, and it is causing many problems in the United States. There are three different types of inflation: demand-pull, cost-push, and built-in. Demand-pull inflation occurs when prices increased because of such high demand. Cost-push inflation is when prices surge resulting from high input costs. Built-in inflation is when prices continue to rise after any natural causes. The inflation occurring in America is a demand-pull. Inflation has affected the United

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

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.

In the short run, it will be noted that the Phillips curve tends to have a downward slope, signifying a potential tradeoff between unemployment and inflation. The Phillips curve, on the other hand, tends to be vertical in the long run implying that there is possibility of the

There are different influences that cause inflation such as energy, food, commodities, and other goods and services. The entire economy is affected by rise of the cost of living. It also affects the cost of operating a business, borrowing money, mortgages, corporate and government bond yields, and every other aspect of the economy. There are several advantages of inflation in the economy. Some include moderate rates of inflation which allows prices to adjust. This is considered a sign of a healthy economy. With economic growth available we usually get a generous amount of inflation. Also moderate inflation rate reduces the actual value of debt. If there is a reduction, the real value of debt increase leads to a squeeze on usuable income.

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

Unemployment and inflation are factors that have negative effects on the performance of the economy as a whole. Therefore, policies to achieve low and stable price inflation, a high and stable level of employment are big macroeconomics issues of our time. This essay focuses on discussing the role of government policy on reducing unemployment and inflation in relation to Keynesian and Monetarist approaches, including examples of impacts of expansionary fiscal and monetary policies on New Zealand economy.

EP and Inflation Targeting to terms of trade shocks could be a way of assessment of these regimes. Frankel (2005) compares the response of PEPI or PEP with Inflation Targeting. Under PEP or PEPI, when the price of exports rises in international market, the currency appreciates. When the export price falls, PEP or PEPI automatically causes depreciation in the currency. This result is desirable and is confirmed by textbook theory.