What is the rationale for the trade-off between inflation and unemployment in the simple Phillips Curve? Why did it come under criticism by many economists in the 1970s?

According to the Phillips curve, there is a trade-off between inflation and unemployment in the short run.Question 1Answera.Trueb.False

The Phillips curve illustrates the relationship between:Question 27Answera.Unemployment and inflationb.Aggregate demand (AD) and aggregate supply (AS)c.Interest rates and investmentd.Income and consumption

The hybrid Phillips Curve assumes inflation is determined as follows: π=πę-b×(ut-u)+Et, where mę=(1-)T-1 +Et[t+]. The parameterb corresponds to the slope of the Phillips Curve,(1-Y)governs how inertial inflation is,and e captures cost-push shocks.If unemployment lowers inflation all else equal and inflation expectations are largely backward looking,what should be true about the parameters of the hybrid Phillips Curve? O There is insufficient information to place restrictions on the parameters. 6>0 andy<0.5 O6<0 and y<0.5 ○b>0andy>0.5 ○b<0andy>0.5

Unemployment, Inflationand the Phillips CurveHow do we judge the performance of any economy? How can we say that onecountry's economy is performing better than another's? There are various mea-surements that can be taken, but the rate of unemployment and the rate ofinflation are certainly two of them. Economists and governments may debatemuch over the appropriate economic policies required for any country, but thereis little or no dissension about the fact that low rates of unemployment andinflation (probably linked with a high rate of economic growth) are the appropri-ate targets. This, then, is the heartland of macroeconomics, both in terms oftheory and of recommended government policy.Theories concerning unemployment and inflation have existed as long as thestudy of macroeconomics. The debates that have raged over the past twodecades in developed economies concerning causes and cures are not new ones.They also constitute part of the fundamental question in economics, namely howwell does the market function if it is left to its own devices? The purpose of thischapter is to outline the suggested causes and to take note of any recent theoreti-cal contributions that may be seen as significant. These may have implicationsfor policy. It will also be necessary to look at the possible relationship betweenunemployment and inflation, another classic area of macroeconomics study.This is best done within the framework of the so-called 'Phillips curve'. Thus,the chapter is divided into the following three sections:1. Unemployment. It is easy to explain what is undesirable about unemploy-ment, but not so straightforward to define it. This is considered. The tradi-tional theories of unemployment are outlined, and then new contributionsare discussed. The implications for policy are noted, in particular the con-troversy concerning the desirability of reducing unemployment benefitlevels.2. Inflation. Definition is once more a problem with inflation, but the undesir-ability of inflation is nowhere near as obvious as is the case with unemploy-ment. This requires careful consideration. The various suggested causes ofinflation are discussed, including the limited recent insights. The implica-tions for policy are also discussed.3. The Phillips curve. The possible relationship between unemployment andinflation was originally formalised by Phillips (1958). This is explained, asis the important challenge made by Friedman (1968) which led to the so-called 'expectations-augmented' Phillips curve. The phenemonen known as'hysteresis', an apparent worsening of any possible trade-off between186S. C. R. Munday, Current Developments in Economics© Stephen C. R. Munday 1996Unemployment, Inflation and the Phillips Curve 187inflation and unemployment, is also considered. Implications for policyarising from the different models are suggested.UNEMPLOYMENTNo one disagrees that unemployment is undesirable. Politicians of all politicalhues will admit the need to keep the rate of unemployment as low as is reason-ably possible (whatever that might mean). If the essence of economics is to con-sider how best to use a nation's limited economic resources to try to meet itsinfinite desires and wants, then the thought of not making use of all availableeconomic resources (in this case, labour) can be seen as little short of economicinsanity. The fundamental economic problem is worse than it needs to be if thereis unemployment. This is not the only concern about unemployment.Unemployment is seen to have social and personal costs. A feeling of worth isoften associated with paid employment. If paid employment is not available,then nor is the feeling of worth. Many people suggest that there is a strong linkbetween unemployment and criminal and delinquent behaviour. Unemploymentimplies inequality between the 'haves' with paid jobs and the 'have-nots' whoare unemployed. Unemployment also creates difficulties for governments. Allunemployment reduces a government's income (due to lower tax receipts) andincreases its expenditure (in the form of unemployment benefit). Insofar asunemployment is not liked by the electorate, then a government which presidesover a significant level of unemployment might be in danger of losing an elec-tion. From every perspective, unemployment is undesirable.Given the concern with unemployment, it is important that its meaning isunderstood. This is not as straightforward as it might at first appear. Forexample, how do we measure the number of people that can be considered asunemployed in a nation? Is it all of those without paid employment? Clearlynot, as some are disqualified by age. Is it, then, all of those of working age whodo not have a paid job? Again, clearly not, as many people choose not to be inpaid employment for good reasons, such as pursuing an educational course orwishing to be fully employed in bringing up a family. Given this, the easiest andmost sensible definition, then, seems to be that it is the number of those whoregister themselves as unemployed, as recorded by the government. This wouldsuggest a number that represents those who are available for work but do notcurrently have any form of paid employment. For various reasons, this figuremay not, however, be seen as fully satisfactory. This figure could underestimatethe level of unemployment. If there are people who would like a job if it wereavailable but are not eligible to receive unemployment benefit (as they would bethe second earner in a household) then they may not register as being unem-ployed. There are various other reasons for an underestimate depending upon thesystem that is operated in any particular country.

The following two charts display the relationship between the unemployment rateand (CPI) inflation for the US, separated into two different historical periods:The third figure charts econometric estimates of the US Phillips curve coefficientfor the period 1981-2018:Macroeconomic Analysis (ECON7074) Page 2 of 3(The first two charts are lifted from “Can the Phillips Curve Help Forecast Infla-tion?” by Kevin Lansing (FRBSF Economic Letter, 2002); the third chart is takenfrom “Prospects for inflation in a high pressure economy: Is the Phillips curve dead oris it just hibernating?” by Peter Hooper, Frederic Mishkin, and Amir Sufi (Researchin Economics, Vol 74, Issue 1, March, 26-62.)a) Briefly interpret these graphs. (4 points)b) Give some possible sensible explanations, or reasons, why the slope of the re-gression line in figure 1 is steeper than the slope of the regression line in figure2 and why the Phillips curve coefficient in figure 3 has fallen (in absolute terms)since its low in 1995. (8 points)c) What does the Australian Phillips curve look like and how does it compareto the US experience? (You will have to do a little independent research. Agood place to start looking for research on this topic is the Reserve Bank ofAustralia.) (4 points)