Question

Discuss the following statements:

a . The Phillips curve implies that when unemployment is high, inflation is low, and vice versa . Therefore, we may experience either high inflation or high unemployment, but we will never experience both together.

b. As long as we do not mind having high inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by using, for example, expansionary fiscal policy.

c. In periods of deflation, workers resist reductions in their nominal wages in spite of the fact prices are falling.

Answer 1

Answer: a philips are implies that when unemployment is high, inflatim ix low and vice versa ; until 1970's philips care implied that when the unemployment is high; inflation is low and when un employment is low, inflation to high. But in 1970's, united states Experiences higher unemployment and high inflation ; a state of economy also referred to as the Stagflation . . The modern form of the philips care also known as the expectation augmented philips cine; shows that if the natural rate of unemployment Rises, then Both the actual unemployment rate and inflation goup. (6) If it is possible to attain of low a level of unemploy - ment rate as possible as long af we do not mind high inflation; (NO)

→ The unemployment rate can be brought below the natural rate of unemployment through expansimary fiscal policy, which will also lead to inflation But of people adjust their inflationary expectations, the Unemployment rate tends to move back to its natural level. To maintain the unemployment below the natural rate of Unemployment would require for ther fiscal expansim and simply high inflation therefore increasing inflation, not @ Deflation, workers resist reductions in their nominal wages in spite of the fact groces are falling: - Deflation is the general fallinprice level of goods and services. It increased the value of money of with same nominal income, a person can purchase more.goods and services. to deflation. • Real wage of workers increase due

In labor market, workers resist nominal wage cuts even when the price of goods and services falls because no one likes to see fall in wages of workers are used to with an increase in annual pay • Therefore in period of deflation, deal wages sise This leads to real wage Unemployment in the economy.