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Location: Macroeconomics Unit IV and V - Inflation, Unemployment, and Economic Growth
Discussion: The long run phillips curve
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 TimChu |
The long run phillips curve
Apr 7 2008, 11:32 AM EDT so the other questions in the threads are pretty much answered and i don't have anything much to say so im starting a new one. hooray me. anyways, the Philips curve explains the relationship between unemployment and rate of inflation right? and the long run PC curve is a vertical line. I'm not sure if we went through this in class, but doesn't that mean the inflation rates of our economy are ever increasing? And isn't that bad for the economy? Does this mean that we're pretty much doomed or is there a way to combat this and bring the inflation rate back down? going out on a limb here so dont bash too hard please :D Do you find this valuable? |
 ConradLiu |
RE: The long run phillips curve
Apr 9 2008, 10:18 AM EDT Umm, ok I'm not too sure about this, so I apologize in advance if this turns out to be wrong...anyway, wasn't it covered in class that an economy will always have increasing inflation rates? I seem to recall that a healthy economy, or at least a normal one, will always have increases in inflation rates; it is considered a problem if these inflation rates, however, begin to skyrocket year after year. For instance, I dunno if this is an accurate approximation, but it could be considered normal or desirable if inflation rates increased by 1-2% every quarter, but when the inflation rates begin to increase by, say, 8 or 9%, then it's an undesirable inflation rate increase--this is pretty much what China is going through. So in a nutshell, I think inflation rates will always increase, and it's not exactly "bad" for the economy unless the increase is a huge one. Do you find this valuable? |
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kevinchiu kevinchiu |
RE: The long run phillips curve
Apr 10 2008, 9:12 AM EDT Well, in my opinion, as Conrad said, a small increase in inflation rate isn't going to harm debtors or benefit borrowers too much. Also, its evident through history that inflation is going to occur to an economy, healthy or not. For instance, hot dogs used to cost 5 cents back in the mid-20th century, yet they were still the same price in RELATIVE terms. Perhaps our future dollar value is just going to increase but still remain relatively the same... That's a good question though; China seems to have its main aim at keeping unemployment low, so inflation is bound to skyrocket like in the long-run Phillips Curve. There is a way to combat inflation, its called constrictive monetary policy. However, I'm not too sure how someone's supposed to combat stagflation.. Do you find this valuable? |
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nicolewong nicolewong |
RE: The long run phillips curve
Apr 10 2008, 10:08 AM EDT I don't think the long run phillips curve means that inflation will increase forever. I think it's supposed to show that in the long-run, no matter what the rate of inflation is, the level of unemployment remains at the natural rate. This is because if price level increases and more people are employed, workers will eventually realize that their nominal wages are actually decreased real wages and they will demand higher wages. Firms will then have to lay off more workers because their input costs have gone up and the unemployment will increase back to the natural rate. Do you find this valuable? |
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kevinyeh kevinyeh |
RE: The long run phillips curve
Apr 10 2008, 11:33 AM EDT Actually, in the real world, price levels aren't generally flexible downwards. So in a sense yes you're right in that price levels tend to keep going up in the long run. But it doesn't matter because the reason why that happens is that people are demanding higher nominal wages to combat the inflation, resulting in the same real wage. So although everything is more expensive, people are also nominally earning more money to purchase those goods. Do you find this valuable? |
 SharonLi |
RE: The long run phillips curve
Apr 10 2008, 12:38 PM EDT In the long run, the natural rate of unemployment is restored but the price level is higher.Even though higher and higher price levels result whenever the Phillips curve shifts out, workers respond to this inflation by demanding higher wages. So we end up with the same purchasing power we began with. Do you find this valuable? |
 andyxu |
RE: The long run phillips curve
Apr 11 2008, 11:04 AM EDT Yes, it is true that inflation rates will continue since disinflation is quite infrequent. Like Kevin Yeh mentioned, this should not be a huge problem as nominal salaries are increased to compensate for increases in price levels. Today, the ten yuan is the most prevalent money note out there years ago it was the one yuan, in a few decades it will be the one hundred yuan bill. Do you find this valuable? |
 HowardJing |
RE: The long run phillips curve
Apr 13 2008, 10:26 AM EDT It is true that price levels are ever increasing, but I don't think that the rate of inflation has to increase as well. Inflation rate is determined by changes in aggregate demand and aggregate supply, so periods of low aggregate demand would have low amounts of inflation, and periods of high aggregate demand would have high amounts of inflation. Do you find this valuable? |
 jinnykwon0314 |
RE: The long run phillips curve
Apr 13 2008, 1:27 PM EDT Well, I agree that price levels are continuously increasing. However, that does not mean that we are doomed in the future from the ongoing rise in inflation rates because as we have learnt, one of the main macro goal is for the economy to establish a stable increase in inflation rates because as price levels increase, our nominal wages adjust to these changes and thus, the purchasing power is regained. I think that the problem with inflation is not its continous increase, but its unstable fluctuations in price levels that lead to confusion and disorder in the economy. Do you find this valuable? |