What is the difference between the the Phillips curve and the expectations-augmented Phillips curve?
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.
Where is NAIRU on the Phillips curve?
NAIRU – definition NAIRU is shown graphically as the level of unemployment at the prevailing long run Phillips curve (LRPC). NAIRU does not necessarily exist at one unemployment rate. Indeed, effective supply-side policy can shift the long run Phillips curve to the left and hence reduce the NAIRU rate.
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.
What does the Phillips curve tell us?
The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa. The Phillips curve was a concept used to guide macroeconomic policy in the 20th century, but was called into question by the stagflation of the 1970’s.
What is the expectation augmented 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 do you mean by NAIRU?
The NAIRU is the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise. It is a concept that helps us gauge how much ‘spare capacity’ there is in the economy. The NAIRU cannot be observed directly.
What is NAIRU theory?
NAIRU stands for the Non-Accelerating Inflation Rate of Unemployment, and the idea is that inflation will accelerate if the unemployment rate falls below the NAIRU level.
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.
Why does rational expectations affects the aggregate supply curve?
The key point is that, because of rational expectations, prices do not wait on events, but adjust immediately. At a macroeconomic level, the theory of rational expectations points out that if the aggregate supply curve is vertical over time, then people should rationally expect this pattern.
Why is the Phillips curve flattening?
As such, the more recent Phillips curve is flatter because of lower wages and compressed wage growth even when unemployment is extremely low. This lack of responsiveness to a tightening market has been a concern for the monetary authorities and their ability to stimulate growth without a fiscal partner.
What is wait unemployment What are its causes?
Unemployment resulting from wage rigidity and job rationing is called wait unemployment. In Classical sense supply curve of labour is vertical because of the assumption that in the long run supply of labour is fixed.