INFLATION,UNEMPLOYMENTANDPHILIPSCURVE.pdfVIP

Macroeconomics 102 A SHORT NOTE ON INFLATION, UNEMPLOYMENT AND PHILIPS CURVE ? Macroeconomic policies are implemented in order to achieve government’s main objectives of full employment and stable economy through low inflation. We can use Philips Curve as a tool to explain the trade-off between these two objectives. ? Philips Curve describes the relationship between inflation and unemployment in an economy. ? You already know that the Inflation is defined by increase in the average price level of goods and services over time. ? When there is inflation, value of money falls. A low inflation rate indicates that average price of goods would not rise as high. ? Unemployment exist when someone is actively seeking for job but unable to find any despite their willingness to accept the going market wage rate (we discussed it many times right? See Ch5) New Zealand-born economist A.W Philips first put this theory forward in 1958 gathered the data of unemployment and changes in wage levels in the UK from 1861 to 1957. He observed that one stable curve represents the trade-off between inflation and unemployment and they are inversely/negatively related. In other words, if unemployment decreases, inflation will increase, and vice versa. Macroeconomics 102 The original Philips Curve: wage inflation against unemployment Inflation (%) Unemployment ? For example, after the economy has just been in recession, the unemployment level will be fairly hi