Question

PC-MR diagram to show that the cumulative unemployment caused by disinflation is Use a dent of the degree of inflation aversion (β) of the central bank. How does this findin change if a) The Phillips curves are convex (b) The Phillips curves are steeper (i.e.

Answer 1

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                The Phillips curve underlines a hierarchical inversely proportional relation between the wage rise in an economy with the rate of unemployment of the economy. As shown above the diagram, slope GH indicates the Phillips curve at a steeper rate. Here it OY2 and OY1 represent the levels of inflation and OX1 and OX2 represent the levels of unemployment. This depicts how the total unemployment which is a result of the disinflation, is not dependent on the degree of inflation (B) in the case of a Central bank. This can be possible only when the Phillips curves are in parallel state and are linear to each other. In such a scenario, the total level of unemployment which could lead to the reduction of the inflation are equal or of the same degree. With the change of the slope of the Phillips curve, this state does not change. i.e. even at a steeper slope of the Phillips curve, both these factors would remain the same.

                                      However, if the slope of the Phillips curves is non-steeper, or in other words of the flat nature at a higher degree of unemployment, which means that the slope is of convex nature, in such a situation, the rate of unemployment will be naturally higher. As shown in the diagram, the slope K2J2 represents the Philips curve under the convex slope circumstance. Here the curve Here, the Philips curve bisects the inflation levels of AM2 , BN2 and CP2 at the points A2 , B2 and C2 respectively. The level of unemployment rises when the slope of the Philips curve is convex in nature.