In The News

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In The News How to Keep Expected Inflation Low In 2004, Finn Kydland and Edward Prescott won the Nobel prize In economics, In part for their work on the role of expectations in policy making. Resist the Siren Song:The Nobel Laureates’ Classical Refrain Has Modern Resonance Odysseus legendarily had himself tied 10 tus ship’s mast before it […]

THE NATURAL EXPERIMENT FOR THE NATURAL RATE HYPOTHESIS

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THE NATURAL EXPERIMENT FOR THE NATURAL RATE HYPOTHESIS Friedman and Phelps had made a bold prediction in 1968: If policymakers try to take advantage of the Phillips curve by choosing higher inflation to reduce unemployment, they  succeed at reducing unemployment only temporarily. This view-that unemployment eventually returns to its natural rate regardless of the rate of inflation-is called […]

THE SHORT RUN PHILIPS CURVE

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THE SHORT RUN PHILIPS CURVE The analysis of Friedman and Phelps can be summarized in the following equation This equation (which is, in essence, manometer expression of the aggregate-supply equation we have seen previously) relates the unemployment rate to the natural rate of unemployment, actual inflation, and expected inflation. In the short run, expected inflation is given, […]

RECONCING THEORY AND EVIDENCE

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RECONCING THEORY AND EVIDENCE At first, the conclusion of Friedman and Phelps that there IS no long run trade-off between inflation and unemployment might not seem persuasive. Their argument was based on an appeal to theory. specifically classical theory’s prediction of monetary neutrality. By contrast, the negative correlation between Elanor and unemployment documented by Phillips, Samuelson, and Solon […]

THE MEANING OF NATURAl

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THE MEANING OF NATURAl What is so natural about the natural rate of unemployment? Friedman and Phelps used this adjective to describe the unemployment rate toward which the economy gravitates in the long run. Yet the natural rate of unemployment is not necessarily the socially desirable rate of unemployment. Nor is the natural rate of unemployment constant over […]

SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF EXPECTATIONS

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SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF EXPECTATIONS The Phillips curve seems to offer policymakers a menu of possible inflation-unemployment outcomes. But does this menu of choices remain the same over time? Is the downward-sloping Phillips curve a stable relationship on which policymakers can rely? Economists took up these questions in the late 1960s, shortly after Samuelson […]

AGGREGATE DEMAND AGGREGATE SUPPLY AND THE PHILIPS CURVE

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AGGREGATE DEMAND AGGREGATE SUPPLY AND THE PHILIPS CURVE The model of aggregate demand and aggregate supply provides an easy explanation for the menu of possible outcomes described by the Phillips curve. The Phillips curve simply shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move the economy […]

ORIGINS OF THE PHILIPS CURVE

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ORIGINS OF THE PHILIPS CURVE In 1958, economist A. W Phillips published an article in the British journal Economics that would make him famous. The article was titled.The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1861-1957. In it, Phillips showed a negative correlation between the rate of unemployment and the […]

THE PHILLIPS CURVE

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THE PHILLIPS CURVE Probably the single most important macroeconomic relationship is the Phillips curve.These. are the words of economist George’ Karloff from the lecture he gave when he received the Nobel prize in 2001. The Phillips curve is the short-run relationship between inflation and unemployment. We begin our story with the discovery of the Phillips curve and its […]

The Short Run Trade off between Inflation and Unemployment

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The Short Run Trade off between Inflation and Unemployment Two  closely.watched indicators of economic performance are inflation and unemployment. When the Bureau of Labor Statistics releases data on these valuables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate and the unemployment rate to produce a misery index. which purports […]