Inflation has been one of the most widely discussed topics by economist of the twenty first century. The term can simply be defined a general and persistent increase in the price level over a period of time…
Let us write or edit the essay on your topic
"The significance of inflation expectations in the monetarist Phillips Curve and t0he implications for the conduct of economic policy"
with a personal 20% discount.
Download file to see previous pages...
Inflation has been one of the most widely discussed topics by economist of the twenty first century. The term can simply be defined a general and persistent increase in the price level over a period of time Major economies of the world have been affected by it and economic analysts throughout the world have put in their expertise to curtail the damages that inflation is capable of doing to an economy. Mr. Alban William Phillips was one of those economists who will always be remembered for his contribution to the world of economics. He’s gathered fame all over the world for his research on inflation and unemployment. He started his work by gathering ninety five years of data relating to the UK wage inflation and unemployment. He was of the view that there is some direct or indirect link among these two important economic indicators. When he plotted the data on a graph, Mr. Phillips concluded that there is an inverse relationship between the rate of unemployment and the level of inflation in an economy. According to Mr. Philips there was a tradeoff between unemployment and inflation. High levels of unemployment tend to be linked with low levels of inflation and vice versa. Accordingly, if the government would want to reduce the unemployment rate it then it would have to settle with high rates of inflation. The Phillips curve concluded that deciding upon whether to have high rates of unemployment or to go for high rates of inflation was merely a matter of government policy as the two of them could not be achieved together – they were mutually exclusive. ...
And this is how the price level rises and inflation occurs. The Phillips curve can further be divided into two time phases, namely the long run and the short run Phillips curve. The two curves are slightly different from each other in that they depict a different side of the picture. In the short run Phillips curve, high rates of unemployment are associated with low rates of inflation and vice versa. In such a situation the economists generally have to take a decision as whether to contain inflation or unemployment. Choices will generally be made after taking the overall economic situation of a country into consideration and definitely the decision made will not be beneficial for all. If the government decides to go for low rates of unemployment, low income earners will face a burden of high prices due to inflation. However, the long term Phillips curve looks at the story from a very different angle. The long run Phillips curve is normally drawn as a vertical line. This line can move both ways but generally it tends to move in (to a lower rate of unemployment) as time passes by. The idea behind long term Phillips curve is that in the long term there will be a certain rate of unemployment regardless of the level of inflation. This level will remain there since some people will always be unemployed due to job switching, frictional and seasonal unemployment. According to Mr. Friedman Milton, an economist, there is no tradeoff between the rate of unemployment and the rate of inflation in the long run as is denoted by the vertical Phillips curve. According to the long run Phillips curve, efforts made by economists to reduce the unemployment level below the natural rate of unemployment
...Download file to see next pagesRead More
Cite this document
(“The significance of inflation expectations in the monetarist Phillips Essay”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1413559-the-significance-of-inflation-expectations-in-the-monetarist-phillips-curve-and-t0he-implications-for-the-conduct-of-economic-policy
(The Significance of Inflation Expectations in the Monetarist Phillips Essay)
“The Significance of Inflation Expectations in the Monetarist Phillips Essay”, n.d. https://studentshare.org/macro-microeconomics/1413559-the-significance-of-inflation-expectations-in-the-monetarist-phillips-curve-and-t0he-implications-for-the-conduct-of-economic-policy.
In this case, traditional Keynesians actually adhere to the principle that through the use of expansionary monetary policy and fiscal policies, the economy would actually increase aggregate demand, which would then result to a reduction in unemployment, a reduction in deflation, and an overall increase in economic activity, regenerating the economy.
The inflation rate over one year is defined as ? = (Pt-Pt-1)/ Pt-1 , where ? stands for inflation rate, Pt is the price level in year t and Pt-1 is the price level in year t-1(Dornbusch,1998). Inflation includes both expected and unexpected inflation1.In this essay the role of inflation expectations in the monetarist Phillips curve and its implications for the conduct of economic policy are discussed.
It is also an inherent power of the state in which everyone provided by the law should and must conform in it. The internal Revenue Code Sections 861-864 determine the source of income and Sections 861(a) and 862(a) specifically allocate certain items of gross income to sources within or without the United States.
Short-run Phillips curve & the long-run Phillips curve
How do active and passive views of these concepts differ? The Philips Curves are fundamental to the study of economics. The Curves represent the relationship between inflation and unemployment rates and, they have cross relationships with aggregate supply curves.
This is measured through the consumer price index over specified duration of time (Hart, 2009). There are two major causes of inflation in any economy which are the demand-pull inflation and the cost-push inflation both of which will be discussed below in detail and their effects explained as well.
The rate of inflation is another important measure of economic performance. Classical economic theory, particularly Irwin Fisher's equation of exchange, empahsises that inflation rate depends on excessive growth of money supply in the economy. Thus, although unemployment and inflation appear to be unrelated issues, Phillips curve establishes the linkage between the two, with empirical evidence.
According to this relationship when there are more people employed in an economy the output increases, so do the wages from the labor force. The increase in wages means that people have more money to spend which increases their demand for goods and services and ultimately