Page 217 - DECO402_Macro Economics

Macroeconomic Theory

Notes falling from point B. In this manner we see that because of expansive monetary and fiscal policy in
the initial cycle of trade cycle Phillips’ inferences are correct. But in lower stages trade-off between
inflation and unemployment foes against Phillips curve.
Johnson does not agree that in making economic policy, Phillips curve may have behaviour. It has two
reasons- "At one side Phillips curve presents just statistical description of procedure of adjustment
in labour market and rests on the easy model of dynamism behind which there is no general or well
tested monetary policy is there on the other side, this curve describes the behaviour of labour market
in combination of periods of economic up and down and changing inflation rates, while these are such
conditions which have possibly influenced labour market itself. That is why this doubt is correctly
only that if through economic policy economy is tried to be nailed at any point of this curve then will
this curve retain its shape or not."

23.5 Summary

y According to Friedman for describing trade-off between unemployment and inflation there
is no need to assume a stable downward right sided Phillips curve. In reality, this relation
is a short term event. But many variables are there of which Phillips curve moves in short
term. The most important variable of these are the expected rate of inflation. As long as there
is difference between the expected rate and actual rate of inflation till then there will be right
side downward sloping Phillips curve. But when this difference ends in long term, Phillips
curve becomes vertical.

23.6 Keywords

y Unemployment— Without employment.
y Long run— Of long period.

23.7 Review Questions

1. Tell the relation in unemployment and inflation according to Phillips curve.
2. Express Friedman’s thoughts on long term Phillips curve.
3. Comment on “Rational expectations and Phillips curve.”
4. What are the implications of Phillips curve policy Tell.

Answers: Self Assessment
1. money wages 2. low 3. (a) 4. (a)
5. (b) 6. (a) 7. True 8. True
9. False 10. False

23.8 Further Readings

Books 1. Macroeconomics— Mohan Srivastava, DND publications, 2010.
2. Macroeconomics: Theory and Policy— H.L Ahuja, S. Chand Publishers,
2010.

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