What is it?
I just know he Phillips curve is a historical inverse relation between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of increase in nominal wages in the economy.
As we know the Government using mostly Fiscal and Monetary policies to cure the problem in the economy.So how to reduce unemployment.It's simply understood that with Fiscal Policy the Government could reduce Tax to encourage Consumption expenditure and investment,which are the components of the aggregate demand.And also with the monetary policy,the Government will control the Bank to lower interest rate with the same aim is to encourage in increase in the conponents of the Aggregate Demand so the Aggregate demand curve will shift to the right.As in the diagram below:
IF there's more demand in the economy,so that there will be more production and then more people will be employed so unemployment will be reduced.But also it will cause the increase in the price level,which is called inflation.The Government Policies to reduce Unemployment leads to increase in Inflation.And opposite,reduce in Inflation may cause Unemployment.
And this is the Phillip's curve diagram:
So the Government have to use the Keynesian theory. Keynesian theory is a macroeconomic theory based on the ideas of 20th-century British economist John Keynes. It emphasizes the role of demand size factors, as opposed to supply side factors, in the determination of aggregate output.But there's also a situation when there's high unemployment and high rate of inflation in an economy.It's called stagflation.It's against the rule says in the Phillip's curve.It seems to be impossible but it happened.
The stagflation happened when there was an increase in the price level of oil.SO inflation was increased.So the cost of the production will be higher.There fore,the businesses redundant and cut off the job of the workers which causes unemployment.So that,there will be less production and therefore there will be less output and services in an economy,because the aggregate supply curve will shift to the left,as shown on the diagram below:
As we see on the diagram,the price level increase so it means increase in the inflation and also the Real National Income has reduced which may cause unemployment to rise as well.
So this is all that I know about the correlation between unemployment and Inflation.
2 comments:
1. How can you have high inflation and high unemployment at the same time?
2. If inflation is high won't that make exports uncompetitive and thus unemployment rises, not falls?
3. If unemployment is low then surely a lot is being supplied and thus supply shifts outwards - so why is there inflation?
4. If inflation falls then exports become competitive and thus unemployment falls - doesn't it?
5. What is the expectatations augmented Phillips curve and what is money illusion?
6. What is the rational expectations curve?
7. Does the Phillips curve trade-off still apply?
Inflation and unemployment are not derived from the same source, so they will not necessarily move in tandem.
Inflation is not rising prices. Rising prices are the result of inflating the monetary base. Unemployment is not the result of deflation or inflation, but is instead the result of trade imbalances that require employees to move into different forms of production.
Obviously, high inflation or deflation can lead to unemployment as the decrease or increase in the value of money alters the profitability of varies lines of production. But, while inflation or deflation of the monetary base may cause shifts in employment, increased or decreased levels of employment cannot cause inflation or deflation since employment is not the cause of increases or decreases of the monetary base. The monetary base in modern economies is controlled by central banks.
So the easiest way to have high inflation and high unemployment at the same time is to hold interest rates to unsustainably low levels while recklessly inflating the monetary base. The low interest rates will allow unsustainable long-term capital projects to commence, and the reckless increase in the monetary base will ensure that prices rage out of control undermining the viability of the long-term capital projects.
In fact this is the model our central planners used to create our current economic meltdown.
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