Page 186 - DECO201_MACRO_ECONOMICS_ENGLISH

Hitesh Jhanji, Lovely Professional University
Unit 11: Control of Inflation and Philips Curve

Unit 11: Control of Inflation and Philips Curve Notes

CONTENTS
Objectives
Introduction

11.1 Consequences of Inflation
11.2 Control of Inflation
11.3 Philips Curve

11.3.1 An Evaluation of Philips Curve
11.3.2 Stagflation
11.4 Summary
11.5 Keywords
11.6 Review Questions

11.7 Further Readings

Objectives

After studying this unit, you will be able to:
State the consequences of inflation;

Discuss the measures to control inflation;
Explain the concept of Philips Curve;
Know the arguments against the Philips Curve;
Realise the effect of stagflation.

Introduction

In the previous unit, you were introduced to the basic theory of inflation and in this unit you
will learn about the consequences of inflation and the measures to control it. Recent studies on
inflation have largely focussed on empirical aspects of inflation and the dilemma relating to the
choice of policy alternatives to control it. The choice of policies to control inflation is determined
by the causes and magnitude of price rise. Demand pull inflation is usually controlled by
monetary and fiscal policies. However, monetary and fiscal policies are often ineffective in
controlling the cost push or supply inflation, since their immediate focus is on curbing aggregate
demand. Obviously, the control of cost push inflation requires non-monetary and non-fiscal
policies. Since the cost push inflation is chiefly caused by rising costs, it can be controlled by
controlling wage increases which are not related to the increase in labour productivity.
This unit also introduces you to the concept of Phillips curve that represents the relationship
between the rate of inflation and the unemployment rate.

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