Thursday, April 23, 2009

inflation and Unemployment

Why should we think about inflation and unemployment together? in an inflation article, A.W. Phillips analyzed data on British inflation and unemployment rates from 1861 to 1957 and reported a statistical regularity which quickly was dubbed the Phillips curve. The unemployment rate tended to be high when the inflation rate was law, and vice versa. this finding raised a tantalizing possibility: Could a policymaker choose between inflation and unemployment (depending on the relative social concern over the two problem), tolerating a higher value of one to obtain a lower value of another? Exploiting this trade-off, U.S. economic policy in the 1960s favored a steadily declining unemployment rate accompanied by a gradually increasing inflation rate. Events of the 1970s and since fundamentally changed this relationship.
To analyze whether there is trade-off between inflation and unemployment, we need to examine the relationships between (1)output changes and the unemployment rate and (2) price adjustment and output changes. AS we consider these relationships, note that analysis of an inflation-unemployment trade-off follows closely the development of the aggregate demand-aggregate Supply model.

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