Phillips Curve Tutor2u

The essay sample on Phillips Curve Tutor2u dwells on its problems, providing a shortened but comprehensive overview of basic facts and arguments related to it. To read the essay, scroll down.

This chart shows the relationship between the rates of the money supply and rising prices for the last 20 old ages. You can see that over this period the rate of the money supply has increased along with the rate of rising prices. This is proven by the correlativity for this information which equates to 0.

513219114 bespeaking a positive, moderate relationship between these 2 variables. This is besides proven by the arrested development line shown on the graph. It shows that as the money supply additions by 1 % , rising prices besides goes up by 0.2697 % , bespeaking the positive correlativity between the 2 sets of informations. However, there are some little anomalousnesss shown on the graph. For illustration, some points of the graph show that as the money supply is increasing, rising prices is falling.

B.3

This chart shows the relationship between the unemployment rate and rising prices over the last 20 old ages. Here you can see that over this period rising prices by and large falls as unemployment is lifting. However, this is non the instance for the full graph. Between 4 and 6 % unemployment, rising prices is lifting as unemployment additions even though the theory of the Philips curve indicates an opposite relationship between these variables. However, the correlativity for this information which equates to 0.10615719 indicates that there is a really weak positive relationship between these variables which conflicts with the opposite relationship.

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This weak positive relationship is besides shown by the arrested development line, which shows that for every 1 % rise in unemployment, rising prices rises by 0.0941 % .

Economic Analysis of the Data for Part B3.

Phillips Curve Tutor2u

( Fig. 1 ) Alban W. Philips was the laminitis of the Philips curve ( Fig. 1 ) after transporting out research into the relationship between unemployment and rising prices. This involved him analyzing 95 old ages of economic informations ( from 1862-1957 ) sing rising prices and unemployment rates in the UK. After analyzing the information, he noticed that by stand foring it on a curve there was an reverse relationship between rising prices and unemployment.

The Phillips Curve ( Bized, 2010 )

The theory behind the curve suggested that as the rate of rising prices rose, the rate of unemployment fell and frailty versa. This can be explained by utilizing the construct of AD and AS. If, for illustration, the economic system was sing strong growing due to rises in consumer disbursement, this would do rightward displacements of the aggregative demand curve. At the same clip this would intend falling degrees of unemployment. However, the rises in AD will besides do inflationary force per unit areas due to decreasing trim capacity in the economic system. If trim capacity is get downing to cut down, this is as consequence of extra demand in the markets which causes a rise in costs of production.

If we look back at the graph demoing the relationship between these two variables, we can see that as the rate of unemployment rises from 2-4 % and from 6-10 % , the rate of rising prices falls. Therefore, for these peculiar parts of the graph we can see that it supports the theory of the Philips curve.

However, the Philips curve was criticised in the late 1970 ‘s – early 1980 ‘s by Milton Friedman when the UK experienced Stagflation i.e. lifting rising prices and unemployment, due to the immense rises in oil monetary values moving as a supply-side daze. This led him to make an account for this by holding fluctuations on the original curve called ‘Expectations-augmented Philips Curve ‘ . Friedman acknowledged the being of the short tally curve, but in the long run his position was that the curve was perpendicular and there was no trade off between rising prices and unemployment. He believed additions in aggregative demand reduced unemployment and increased rising prices, as the curve suggests, but would merely hold an consequence on occupations in the short term. This can be explained from the undermentioned diagram:

( Fig. 2 )

Expectations-Augmented Phillips Curve ( Bized, 2010 )

From figure 2, you can see that if an economic system began at point ‘U ‘ with rising prices at 0 % and unemployment being excessively high, the province may make up one’s mind to increase demand by 5 % to cut down unemployment. This is illustrated by a motion along the curve to indicate ‘V ‘ . However, after the addition in demand, there are likely to be deficits ensuing in increased monetary values. As monetary values rise, more people seek higher rewards ; there-by increasing the costs for houses and as a consequence the sum supply curve would switch left. As a consequence of their increased costs, houses will look to keep their net income borders by puting off workers, increasing unemployment. The economic system would so travel back to an unemployment degree of ‘W ‘ . This indicates that unemployment can lift along with rising prices when ‘cost push rising prices ‘ occurs.

If we look back at the graph between the two variables, we can see that as unemployment rises from 4-6 % , rising prices is lifting with along with it. Therefore, we can see that some of the informations findings for the last 20 old ages struggle with the theory of the Philips curve.

In decision, we can see that over this period, the information has by and large supported the theory of the Philips curve. However, some parts of the informations besides majorly struggle with the theory. This was shown during the 1970’s-80 ‘s when the UK experient Stagflation due to the Oil supply side dazes.

Mentions

Bized ( 2010 ) Monetary Policy – Inflation – Causes – Theory 4 – Phillips Curve – is unemployment inflated? [ online ] available from & A ; lt ; hypertext transfer protocol: //www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories4.htm & A ; gt ;

Ruttenberg, L. , Tregarthen, T. ( 2009 ) Principle of Macroeconomics. New York: Flat World Knowledge

Smith, L. ( n.d ) ‘Examining the Philips Curve ‘ . [ on-line ] available from & A ; lt ; hypertext transfer protocol: //www.investopedia.com/articles/economics/08/phillips-curve.asp & A ; gt ;

Tutor2u ( n.d ) A2 Macroeconomics/International Economy – The Phillips Curve [ online ] available from & A ; lt ; hypertext transfer protocol: //tutor2u.net/economics/revision-notes/a2-macro-phillips-curve.html & A ; gt ;