Page 202 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 11: Control of Inflation and Philips Curve

11.5 Keywords Notes

External Commercial Borrowings: It is an instrument used in India to facilitate the access to
foreign money by Indian corporations and PSUs (Public Sector Undertakings).

Fiscal Policy: Government spending policies that influence Macro Economic conditions.
Full Employment: A situation in which all available labor resources are being used in the most
economically efficient way.

Indexation: A system of economic control in which certain variables (as wages and interest) are
tied to a cost-of-living index so that both rise or fall at the same rate and the detrimental effect
of inflation is theoretically eliminated.
Monetary Policy: Actions of a central bank, currency board or other regulatory committee that
determine the size and rate of growth of the money supply, which in turn affects interest rates.
Philips Curve: Graphic description of the inverse relationship between wages and unemployment
levels (higher the rate of change of wages, lower the unemployment, and vice versa).

Stagflation: A situation in which the inflation rate is high and the economic growth rate is low.
Unemployment: A situation where someone of working age is not able to get a job but would
like to be in full time employment.

11.6 Review Questions

1. Discuss the consequences of inflation.
2. Suggest various control measures for inflation.
3. Explain stagflation and suggest appropriate treatment for it.
4. What do you mean by money illusion? Why is the existence of money illusion important
to the derivation of the short run Phillips Curve?
5. Examine a tradeoff between wage inflation and unemployment. Why will attempts to
bring the unemployment rate below the natural rate result in accelerating rates of inflation.
How relevant is the Phillips curve phenomenon in overpopulated developing economies
like India?

6. What economic rationale can be advanced to explain the Phillips curve? Why do those
who believe in a natural rate of unemployment contend that the Phillips curve is vertical
in the long run?
7. Can cost push inflation be controlled using the same measures that are used to control
demand pull inflation? Why? or Why not?
8. Give the arguments against the concept of Philips Curve? Are those arguments valid?
9. Explain graphically the effect of stagflation on an economy.
10. State any one incident that lead or can lead to a stagflation situation.

Answers: Self Assessment

1. True 2. True

3. False 4. True

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