Evaluate whether the Phillips curve can still validly resolve today’s issues of unemployment and inflation and...

Evaluate whether the Phillips curve can still validly resolve today’s issues of unemployment and inflation and forecast unemployment and inflation. Why or why not?

Solutions

Expert Solution

We can forecast on whats the inflation and unemployment in both the short-run and long run.

The short-run Philips curve shows the inverse relationship between the level of unemployment and the rate of inflation. There is a trade-off between the unemployment rate and inflation in the short run. There is an increase in inflation when there is a decrease in unemployment in the short because when the unemployment decreases the income of people increases and the purchasing power of people increase and the consumption increases and this will cause the aggregate demand to increases and hence this will give rise to demand-pull inflation.

However, in the long run, the higher unemployment will lead to higher inflation. Long run Philips curve shows while there may be a trade-off between unemployment and inflation in the short run =, there's no trade-off in the long run. The long-run Philips curve is represented by a straight vertical at the natural rate of employment. Since there is a higher inflation worker demand for higher wages so firm's cost of production increases and so they cut back on the employment and hence higher unemployment in the long run. It is not possible to reduce the natural rate of unemployment by increasing the aggregate demand in the long run as this will just result in higher inflation and thus more unemployment.

Rahul Sunny answered 2 months ago

Next > < Previous

Related Solutions

Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve: ??=???????(???????). In...

Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve: ??=???????(???????). In addition, suppose that the country involves two political parties, the Left and the Right. Suppose that the Left party always follows a policy of high money growth and the Right party always follows a policy of low money growth. What “political business cycle” pattern of inflation and unemployment would you predict under the following conditions? 1) Every four years, one of the parties takes...

If a Phillips curve shows that unemployment is high and inflation is low in the economy,...

If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy: a) is producing at a point where output is less than potential GDP. B) is producing at its potential GDP. C) is producing at a point where output is more than potential GDP. D) is producing at its equilibrium point. Question 21 pts A fiscal policy that increases government spending or cuts taxes is most appropriate when the economy is in:...

7. To move to a point on the Phillips curve where inflation is lower, A. unemployment...

7. To move to a point on the Phillips curve where inflation is lower, A. unemployment must fall. B. the Fed could increase the money supply. C. the government could decrease taxes. D. All of the above E. None of the above are correct. which of the following statements is (are) correct? (x) During the early 1960s, inflation was about 1 to 3 percent in the United States, compared to about 4 to 6 percent in the late 1960s and...

33. Demand shocks move unemployment and inflation in A) the same directions, as the Phillips Curve...

33. Demand shocks move unemployment and inflation in A) the same directions, as the Phillips Curve suggests. B) opposite directions, as the Phillips Curve suggests. C) the same directions, which is not what the Phillips Curve suggests. D) opposite directions, which is not what the Phillips Curve suggests. E) circles. 34. When Komal gathers up all of her loose change and deposits it in her chequing account, the immediate effect is A) both M1+ and M2+ increase. B) M1+ increases...

To move to a point on the Phillips curve where inflation is lower, unemployment must rise...

To move to a point on the Phillips curve where inflation is lower, unemployment must rise and the unemployment rise could have been caused by the Fed decreasing the money supply. Select one: True False According to the natural rate hypothesis (Friedman and Phelps), policymakers face a long-run Philips curve that is vertical because the natural unemployment rate is independent of the inflation rate. Select one: True False The federal government could increase spending and decrease taxes to move to...

1. According to the Phillips curve, policymakers could reduce both inflation and unemployment by A. increasing...

1. According to the Phillips curve, policymakers could reduce both inflation and unemployment by A. increasing the money supply. B. decreasing government expenditures. C. increasing government expenditures. D. raising taxes. E. None of the above is correct. which of the following statements is (are) correct? (x) The natural rate of unemployment is the rate of unemployment that the economy tends to move to in the long run and it is not dependent on the money supply. (y) A vertical long-run...

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off...

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.True or false?(+explanation)

Briefly explain the Phillips curve relation between inflation and unemployment and its policy implications for macroeconomic...

Briefly explain the Phillips curve relation between inflation and unemployment and its policy implications for macroeconomic management. What challenge did the Phillips curve relation pose to the Keynesians working in the economic environment of the post-War period and how did Keynesians reconcile to it? Briefly explain implication and predictive inconsistency of the Keynesian-neoclassical synthesis model.

The short-run Phillips curve is the negative short-run relationship between the unemployment rate and the inflation...

The short-run Phillips curve is the negative short-run relationship between the unemployment rate and the inflation rate. Suppose the Phillips curve is given by ?t = ?e + 0.2 – 5ut where ?e= ? ?t-1. In this context ? is the actual inflation rate, ?e is the expected inflation rate and ? is a parameter indicating the relative speed of adjustment of expected inflation to actual inflation. Explain to the best of your abilities, the following questions. a) Explain the difference between...

Explain the trade off between inflation and unemployment. Draw a Phillips Curve that illustrates this trade-off.

Subjects