Augmented phillips curve, Macroeconomics

Assignment Help:

Q. Augmented Phillips curve?

Remember that Phillips curve, as it was incorporated into the Keynesian model, presumed a stable relationship between wage inflation andunemployment: for a given level of unemployment (say U = 5%), a given level of wage inflation would apply (say Πw = 4%). As U increased, Πw would fall and vice versa.

Mathematically, Phillips curve may be explained by a decreasing function f as Πw = f(U). In neo-classical synthesis, expected inflation is added and Πw = f(U) + Πe. To justify this amendment, imagine U = 5% and Πw = 4% (so that we are on Phillips curve) and expected inflation rises from 4% to 6%. As employees care about real wages, it's reasonable to presume that Πw will increases as well (for a given U) and Phillips curve will shift upwards. 

1649_Augmented Phillips curve.png

Figure: The augmented Phillips curve

According to synthesis, Phillips curve should be drawn for a given value of Πe and it should be shifted upwards (downwards) as Πe increases (decreases). When position of Phillips curve is allowed to depend on Πe, is known as augmented Phillips curve (or expectations-augmented Phillips curve). This amendment to Phillips curve is actually a consequence of a criticism of conventional Phillips curve and Keynesian model from the late 1960's (Keynesian - Monetarism debate).


Related Discussions:- Augmented phillips curve

Goods services will be produced and sold in the us, Who decides what goods ...

Who decides what goods services will be produced and sold in the US? Ans) It is mostly the American consumer. The US government also plays a big role in the nation's economy, co

Account that earns, Suppose you have decided to do some savings. You will d...

Suppose you have decided to do some savings. You will deposit $200 this year into an account that earns 2% per year and increase the amount deposited each year by 20% in every year

Calculating the accounting and economic profit , Kate uses a sewing machin...

Kate uses a sewing machine to alter and repair clothes for one year in her own small business, Kate's Tailoring. She earns $20,000 during the year for various sewing projects. In t

Highest willingness to pay, Since anyone is able to obtain a license, not n...

Since anyone is able to obtain a license, not necessarily the low cost suppliers of archery lessons, and it is not necessarily the individuals with the highest willingness to pay w

Marginal tax rates imposed on individuals and families, Compared with the s...

Compared with the situation before 1981, the marginal tax rates imposed on individuals and families with high incomes are now lower. What was the top marginal personal income tax r

What is money has nothing to do with token itself, What is money has nothin...

What is money has nothing to do with token We also consider that what is money has nothing to do with token or commodity itself: USD is money in United States but not in

How many pounds of potatoes will she purchase, Potatoes cost Janice $1 per ...

Potatoes cost Janice $1 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. If she feels that the first pound of potatoes is worth $1.50, the sec

Find supply curve-perfect competition and entry decisions, ChoppinAxe is a ...

ChoppinAxe is a small Swedish firm that produces wood planks and operates in a perfectly competitive market. Every firm in the market has the following total cost function: C(qi

Effects in addition to the direct effect on dairy prices, Subsidy programs ...

Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on dairy prices. What impact do you suppose farm subsidies are likely to have on

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd