Page 213 - DECO402_Macro Economics

Macroeconomic Theory

Notes Criticism
Accelerationist hypothesis of Friedman has been criticised on the following bases:
1. Vertical long term Phillips curve is rate related to steady rate of inflation. But is not a correct
thought without tendency of reaching a stable stage, economy always passes through the
categories of imbalance situations. In such situation, expectation may fail from year to
year.
2. Friedman does not give any new theory that how are expectations made which are free of
theoretical and statistical biases. By this his situation remains unclear.
3. By vertical long term Phillips curve it is meant that all expectations are satisfied and people
are correctly guessing the inflation of the future. Critics have to say that people are not able
to correctly guess the inflation rate, specially, when it is almost determined for some prices
to rise faster than others. Because of the uncertainties of future, imbalance between demand
and supply and increase in unemployment rate is definite. Removing unemployment is a
far off dream, it may make the situation worse from bad.
4. In one of his articles, Friedman has himself accepted this possibility that long term Philips
curve cannot be absolutely vertical, instead with increasing quantities of inflation it may be
bent down towards right side which will bring increasing inflation.
5. Some economists say that at high rate of unemployment, wage rate have not increased.
6. It is believed that there is money illusion in labourers. They are more worried about increase
in their money wage rates as compared to actual wage rates.
7. Some economists understand that natural rate of unemployment is mere illusion because
Friedman has made no attempt to give its clear definition.
8. Saul Hyman has estimated that long term Phillips curve is not vertical but is sloped
negatively. Hyman’s view is that if we are ready to accept increase in inflation rate then rate
of unemployment may be reduced permanently.

Did You Know? There is short term trade-off between inflation and unemployment.

Self Assessment
Multiple Choice Questions:
3. Second reason influencing this inverse relation between money wage rates and unemployment
is ................
(a) Nature of trade activities (b) Labour
(c) Money (d) None of these
4. In the period of increasing trade activities when unemployment will be falling along with
increasing demand of labour, then masters will increase the ................
(a) wages (b) labour
(c) time (d) none of these
5. If labour productivity rate increases equal to money wage rates then ............... will not rise.
(a) rate of labour (b) prices
(c) rate of wages (d) none of these

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