July 14, 2018
Professor Ryan SchoenrockPhillips Curve
In the 1900’s, inflation and unemployment were on the rise. It is known as stagnation and this affected the economy back then. Today, economist compare what has taken place in the past. With the data they collect, we have a heads up in how our economy will turn out. We can see when inflation increases and or decrease. The same goes for the unemployment rate. The two are graphed on the Phillips Curve. One will rise while the other falls.
The Phillips curve is a relationship between inflation and unemployment. This relationship can be described as stable and inverse. According to (Investopedia, n.d.) the inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. This belief system caused many governments to adopt a “stop-go” strategy where a target rate of inflation was established, and fiscal and monetary policies were used to expand or contract the economy to achieve the target rate. Next, stagflation played a role in the Phillips curve by the stagnant economic growth. This means when unemployment was high, so was the price of inflation.
Next, expansion can be a positive thing for the economy. At this point the economy should be in a recovery phase. Also, when businesses have activity the GDP expands until it reaches a peak, according to (Investopedia, n.d.). The policy makers and economists play a part in keeping track of our economy. They monitor what happened in the years that have past. To make improvements for the years to come. An example of expansion is, “when the Federal Reserve lowers interest rates and buys back bonds in the open market to add money to the financial system (Investopedia, n.d.)”. When expansion takes place, the unemployment rate decreases. This helps money flow accordingly and freely through our economy.
Then, we have the Contractionary Policy which reduces the government spending and deficit spending. It also reduces the rate of monetary expansion by a central bank says (Investopedia, n.d.). The central bank has three functions: “To conduct monetary policy, to promote stability of the financial system, and to provide banking services to commercial banks and other depository institutions and provide banking services to the federal government (OpenStax College, 2014, p. 572). Expansion and Contractionary are the opposite of one another. One of these variables usually falls when the other rises. According to (Picardo, 2018), over the last two years, unemployment has fallen while inflation has begun to rise albeit not by much. Since 2010, U.S. inflation has remained stubbornly low even (currently 2.5%) as the unemployment rate has trended steadily lower from 10% in October 2009 to roughly 4% in 2018. In other words, the inverse correlation between the two indicators isn’t as strong as it was in prior years.
Next, we still have our future ahead of us and must continue to observe unemployment and inflation. As of today, we have seen how low our unemployment rate has gotten. We have even experienced lower inflation and wage gains and inflation has been under control. The wage gains were a surprise to me when I first heard about it. I was also thankful of this improvement at the same time. The inflation rate will continue to depend on our money supply growth rate.
In conclusion, we have learned why the Phillips Curve is used. We know where our economy stands today. It is an improvement from the past. The value of a dollar has changed and will continue to do so. The unemployment rate will also have it’s high and lows for the future to come. This will also affect the supply and demand chain.
RefeencesPicardo E. (11 May 2018). How Inflation and Unemployment Are Related. Retrieved from https://www.investopedia.com/articles/markets/081515/how-inflation-and-unemployment-are-related.asp
Investopedia.com. (n.d.). Phillips Curve. What is the ‘Phillips Curve’? Retrieved from https://www.investopedia.com/terms/p/phillipscurve.aspInvestopedia.com. (n.d.). Expansion. Examples of Expansion and Contraction. Retrieved from https://www.investopedia.com/terms/e/expansion.asp
Investopedia.com (n.d.). Contractionary Policy. What is ‘Contractionary Policy’? Retrieved from https://www.investopedia.com/terms/c/contractionary-policy.asp
OpenStax College. (19 March 2014) (p.572). Principles of Economics. Retrieved from file:///C:/Users/Girls%20Who%20Code/AppData/Local/Packages/Microsoft.MicrosoftEdge_8wekyb3d8bbwe/TempState/Downloads/Principles_of_Economics_Chapter_28%20(1).pdf