# 13.2 The policy implications of the neoclassical perspective  (Page 2/13)

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Visit this website to read “The Federal Reserve Bank of Cleveland’s Economic Commentary: A New Approach to Gauging Inflation Expectations” by Joseph G. Haubrich for more information about how expected inflation is forecast.

## The neoclassical phillips curve tradeoff

The Keynesian Perspective introduced the Phillips curve    and explained how it is derived from the aggregate supply curve. The short run upward sloping aggregate supply curve implies a downward sloping Phillips curve; thus, there is a tradeoff between inflation and unemployment in the short run. By contrast, a neoclassical long-run aggregate supply curve will imply a vertical shape for the Phillips curve, indicating no long run tradeoff between inflation and unemployment. [link] (a) shows the vertical AS curve, with three different levels of aggregate demand, resulting in three different equilibria, at three different price levels. At every point along that vertical AS curve, potential GDP and the rate of unemployment remains the same. Assume that for this economy, the natural rate of unemployment is 5%. As a result, the long-run Phillips curve relationship, shown in [link] (b), is a vertical line, rising up from 5% unemployment, at any level of inflation. Read the following Work It Out feature for additional information on how to interpret inflation and unemployment rates.

## Tracking inflation and unemployment rates

Suppose that you have collected data for years on the rates of inflation and unemployment and recorded them in a table, such as [link] . How do you interpret that information?

Year Inflation Rate Unemployment Rate
1970 2% 4%
1975 3% 3%
1980 2% 4%
1985 1% 6%
1990 1% 4%
1995 4% 2%
2000 5% 4%

Step 1. Plot the data points in a graph with inflation rate on the vertical axis and unemployment rate on the horizontal axis. Your graph will appear similar to [link] .

Step 2. What patterns do you see in the data? You should notice that there are years when unemployment falls but inflation rises, and other years where unemployment rises and inflation falls.

Step 3. Can you determine the natural rate of unemployment from the data or from the graph? As you analyze the graph, it appears that the natural rate of unemployment lies at 4%; this is the rate that the economy appears to adjust back to after an apparent change in the economy. For example, in 1975 the economy appeared to have an increase in aggregate demand; the unemployment rate fell to 3% but inflation increased from 2% to 3%. By 1980, the economy had adjusted back to 4% unemployment and the inflation rate had returned to 2%. In 1985, the economy looks to have suffered a recession as unemployment rose to 6% and inflation fell to 1%. This would be consistent with a decrease in aggregate demand. By 1990, the economy recovered back to 4% unemployment, but at a lower inflation rate of 1%. In 1995 the economy again rebounded and unemployment fell to 2%, but inflation increased to 4%, which is consistent with a large increase in aggregate demand. The economy adjusted back to 4% unemployment but at a higher rate of inflation of 5%. Then in 2000, both unemployment and inflation increased to 5% and 4%, respectively.

Step 4. Do you see the Phillips curve(s) in the data? If we trace the downward sloping trend of data points, we could see a short-run Phillips curve that exhibits the inverse tradeoff between higher unemployment and lower inflation rates. If we trace the vertical line of data points, we could see a long-run Phillips curve at the 4% natural rate of unemployment.

what are the side effects of government policies
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
REHMA
if there is a negative technology shock to the economy in short run the firms production cost will go up and labor goes down and thus consumption and production will be lower than before. the government can spend to create jobs and central Bank can lower the interest rates
Dine
what are marlet prices
price which includes net indirect taxes
Anish
what is aggregate demand
what is micro economics
microscopic study...
REHMA
microeconomics is study of individual, household and firms of division making and allocation of resources.
himanshi
absolutely
Shahzaib
😄😂😅
Thi
Join me in Vietnam
Thi
cũygi👅
Thi
Zaiveisho
microeconomics is the study of an individual unit in an economic system or an household
DAMIAN
what really cause inflation?
is ther forgon alternative. is the amount sacrifice of one thing to gain another thing
Alie
what is enflation rate?
Is it inflation rate sir
Bilal
yes
Mohibullah
This is the annual rate of increase of basic household goods and services and measures also the cost of living and doing business in a country. it's a important information when making for forecast or business plans.
this is continuous increase of overall price level
Bethwel
the betewen microeconomics and macroeconomics is microeconomics is concerned with individual scarcity like household,workers and so on while macroeconomics is focuced on the problème winth organisation the collaboration with others companies the profits and then the growth of the organisation
what is tax base
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.
Mare
what is economic system
Quantity of Gasoline in millions was?
1000cubic meter
Keyrene
definition of phillips curve
what is closed economy
an economy that is not open
Chris
meaning: The economy is a closed system, there is not trade between this economy and another one, so no shared market. just a system with no outside influences.
Chris
thanks
Nati
what are the decision-making unit of an economy..?
Nati
an economy which is not involved in exchange with foreign countries
Manjisha
what is the demand curve
it is the graph of aggregate demand in a market
Chris
the demand curve is a graph showing the quantity demand and price and the numbers and numbers of units at various quantity demanded
Paitience
' it is a diagram with two axes one represent price, the other represents quantity demanded. the curve slops downwords from left to right interpreting the Law of demand (reversed proportion between price and demand ) The higher the price the lower the demand..
Isameldin
What is DMU and how affects demand?
Isameldin
what is the correlation between poverty inequality and crime
What is economic growth
STEPHEN
An increase in the production of goods and services.
Bilal
economic growth is the quantative approach , in which the GDP of nation is increase..
Suzie
poverty and inequality is a direct result of the unequal distribution of wealth. Crime is directly related to poverty and inequality, if a minority of a population control the resources and wealth of a nation, the majority will tend to illegal activities to gain resources to sustain their demand.
what is enflation rate?
Mohibullah