friendman Phelps Expectations Augmented Phillips Curve (1 Viewer)

[mizosoup]

wow that sure is a long title

anywho, can someone describe and/or explain this graph to me? can't find my notes etc on it...

 

[nick1048]

I have no idea what your talking about lol sorry. Maybe a diagram would help... philips curve operates on the principle of conflicting economic policy. I'm not sure as to the pedantics of specific curves I'm sorry

 

[Rafy]

http://cepa.newschool.edu/het/essays/keynes/inflation.htm

Explained in Section D.

but woah, calm down there......this is just Year 12. You only really need to know what the phiilips curve is, what the basic curve looks like, the problems with the curve stagflation etc....and that at the most.

I dont know why you would really go into such detail with the phillips curve / stagflation in an exam essay etc....its very unlikely.

But this may explain the concept a little better

Expectations-augmented Phillips Curve

The Phillips Curve showed a
trade-off between unemployment and inflation.
However, the problem that emerged with it in the
1970s was its total inability to explain
unemployment and inflation going up together -
stagflation. According to the Phillips curve they weren't
supposed to do that, but throughout the 1970s they
did. Friedman then put his mind to whether the
Phillips Curve could be adapted to show why
stagflation was occurring, and the explanation he
came up with was to include the role of
expectations in the Phillips Curve - hence the name
'expectations-augmented' Phillips Curve. Once again
the supreme logic of economics comes to the fore!

Friedman argued that there were a series of
different Phillips Curves for each level of
expected inflation. If people expected inflation to
occur then they would anticipate and expect a
correspondingly higher wage rise. Friedman was
therefore assuming no 'money illusion' - people
would anticipate inflation and account for it. We
therefore got the situation shown below:

[Phillips curve]

[@@]

Say the economy starts at point U, and the
government decides that it want to lower the level
of unemployment because it is too high. It
therefore decides to boost demand by 5%. The
increase in demand for goods and services will
fairly soon begin to lead to inflation, and so any
increase in employment will quickly be wiped out as
people realise that there hasn't been a real
increase in demand. So having moved along the Phillips Curve
from U to V, the firms now begin to lay people off once again
and unemployment moves back to W. Next time around
the firms and consumers are ready for this, and
anticipate the inflation. If the government insist
on trying again the economy will do the same thing
(W to X to Y), but this time at a higher level of
inflation.

Any attempt to reduce inflation below the level at
U will simply be inflationary. For this reason the
rate U is often known as the natural rate of
unemployment.


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[nick1048]

lmao this looks freaky! how cool!

 

[mizosoup]

thanks mate

i just wanted to know because i remember learning it but i couldnt find my notes on it