What are the expectations of the Phillips curve?
The expectations-augmented Phillips curve is the straight line that best fits the points on the graph (the regression line). It summarizes the rough inverse relationship. According to the regression line, NAIRU (i.e., the rate of unemployment for which the change in the rate of inflation is zero) is about 6 percent.
What does the inflation expectations-augmented Phillips curve imply?
The expectations-augmented Phillips curve assumes that if actual inflation rises, expected inflation will also increase, and the Phillips curve will move upwards so as to give the same expected real wage increase at each employment level.
What is the main point or interpretation of the Phillips curve?
The main implication of the Phillips curve is that, because a particular level of unemployment will influence a particular rate of wage increase, the two goals of low unemployment and a low rate of inflation may be incompatible.
Does the Phillips curve show expected inflation?
The level of the Phillips curve thus depends on the expected rate of inflation. When the expected rate of inflation rises from T0 to T1 the curve shifts up from P0C0 to P1C1. The natural rate of unemployment U0 is then associated with the higher equilibrium inflation rate T1.
How can rational expectations affect Phillips curve?
Under rational expectations, the Phillips curve is inelastic in the short-term because people can correctly predict the inflationary impact of public policy. According to rational expectations, there is no trade-off – even in the short turn.
How does the original Phillips curve differ from the expectations augmented Phillips curve?
Explain how the original Phillips curve differs from the expectations-augmented Phillips curve (or the modified, or accelerationist Phillips curve). Original Phillips curve stated an increase in unemployment led to lower inflation. But modified Phillips curve states increased unemployment leads to decreasing inflation.
What are the effects of rational expectations?
The idea behind the rational expectations theory is that past outcomes influence future outcomes. The theory also believes that because people make decisions based on the available information at hand combined with their past experiences, most of the time their decisions will be correct.
What is the expectations augmented Phillips curve?
Expectations-augmented Phillips curve. The expectations-augmented Phillips curve introduces adaptive expectations into the Phillips curve. These adaptive expectations, which date from Irving Fisher’s book “The Purchasing Power of Money”, 1911, were introduced into the Phillips curve by monetarists, specially Milton Friedman.
How was the expectations-augmented Phillips curve first used to explain monetarism?
Therefore, we could say that the expectations-augmented Phillips curve was first used to explain the monetarists’ view of the Phillips curve. Adaptive expectations models led to an important shift in the perception of a government’s ability to act.
What is a version of the Phillips curve?
A version of the Phillips curve, relating wage increases to demand pressure, taking account of expected inflation. If the expected rate of price increases is given, the Phillips curve shows wage increases as a decreasing function of the unemployment rate, or an increasing function of demand pressure.
What happens to the Phillips curve when unemployment decreases?
Expectations shift to point B along the Phillips curve: unemployment is reduced through economic stimulus with a trade off in the form of inflation. However, after a short period, agents will begin to associate expansionist policies with inflation, which means a drain on their resources, and they will push for higher wages.