Page 201 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes The Indian economy experienced stagflation during the mid-60s and the mid-70s and again
during 1990-93 when high rates of inflation have coexisted with very low rates of growth. The
rate of growth of real national income between 1964-65 and 1974-75 was 1.35% per annum while
the average rate of inflation during the same period was over 9% per annum. Stagflation
reappeared towards the close of the 7th five year plan when a double digit inflation coupled
with near stagnation of real national output threatened to throw the economy out of gear.
Several industries under the grip of recession were forced to curtail their output substantially,
leading to worsening of the industrial employment situation.

Self Assessment

Fill in the blanks:
10. The negative slope of Philips Curve suggests that the rate of inflation and the rate of
unemployment are .................................. related.
11. The Philips Curve gets ................................... at low rates of unemployment.
12. When the unemployment rates are ........................................, trade unions tend to press for
higher money wages.
13. The combination of high and accelerating inflation and high employment is known as
.......................................
14. Philips Curve is usually thought of as relating price inflation to ............................
15. Philips Curve has a ................................... slope.

11.4 Summary

Inflation has its impact on the industry normally through the impact it exercises on such
Macro Economic variables like interest rate prevailing in the economy, growth rate
experienced, investment and credit off take et al besides of course the impact on availability
and dearness of factors of production.
Demand pull inflation is usually controlled by monetary and fiscal policies. According to
monetarist approach to inflation which is rooted in the quantity theory of money, demand
pull inflation is basically caused by excessive monetary expansion.
Monetary and fiscal policies are often ineffective in controlling the cost push or supply
inflation, since their immediate focus is on curbing aggregate demand. Cost push inflation
is not the result of aggregate demand rising in excess of full employment output in the
economy.
Inflation can be controlled by using monetary policy, fiscal policy, wage control, price
control and indexation.
Phillips found negative relation between the rate of wage increases and the rate of
unemployment in England during the period 1862-1957.
The negative slope of PC suggests that the rate of inflation and the rate of unemployment
are inversely related. The curve also implies that a fairly high percentage of unemployment
is necessary for maintaining non-inflationary price stability.
The combination of high and accelerating inflation and high employment is known as
stagflation. When the government utilises expansionary monetary or fiscal policy in an
attempt to lower unemployment below the natural rate, expectations of inflation exceed
actual inflation and the short run Phillips curve shifts upward. Inflation continually
increases until government gives up its attempt to do the impossible.

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