Four question test for all Libs AND Cons (and everyone else):?

Question

1) What is the Phillips Curve?

2) Do you think it applies (was Phillips right or wrong)?

3) Why or why not? (If why, how do you explain the 1970s, if why not, why is there often a temporary correlation between CPI and employment)?

4) What camp are you in ideologically (Lib, Con, Libertarian, other...)?

Yes, there is a "right" answer to 1, 2 and 3 and I'll reveal it when I choose a best answer.

About to pick a best answer, need the full 1000 characters for the explanation.

Best answer gets it all right and there were some that were 90% there - I'd like to add some detail.

Phillips had the relationship wrong because he assumed cause and effect when the reality was the same cause - money inflation - was having two effects, one temporary (higher employment) and one permanent-as-long-as-the-cause-wasn't-reversed (consumer price inflation).

See, tax rates were so high in the 1940s when Phillips wrote that the only way to fuel growth was through the printing press. In the short term this produces growth and high employment but unless reversed it produces runaway inflation and the unemployment returns, which is what happened in the 1970s, finally revealing that Phillips was wrong and Friedman was right.

Tax cuts since then have enabled the economy to retain and reinvest its earnings.

Answer 1

1) An observed relationship between unemployment and inflation that unraveled over time

2) Very limited functionality

3) It is too simplistic and doesn't factor monetary policy, productivity, and factors that encourage investment and currency valuation

4) Libertarian

Answer 2

Qutoting from the article in Wikipedia

Most economists no longer use the Phillips curve in its original form because it was shown that it simply did not work. This can be seen in a cursory analysis of US inflation and unemployment data 1953-92. There is no single curve that will fit the data, but there are three rough aggregations—1955-71, 1974-84, and 1985-92—each of which shows a general, downwards slope, but at three very different levels with the shifts occurring abruptly. The data for 1953-54 and 1972-73 does not group easily and a more formal analysis posits up to five groups/curves over the period.

Still today, however, a modified form of the Phillips Curve, called the expectations-augmented Phillips curve, remains influential. This version of the theory maintains that the Phillips curve shifts up if inflationary expectations rise, as argued by Edmund Phelps and Milton Friedman. This new view of the Phillips curve agrees that in the long run policy cannot affect unemployment, for it will always readjust back to its "natural rate." However, this new Phillips Curve does allow for short run fluctuations and the ability of a monetary authority such as the central bank to temporarily decrease unemployment for an increase in inflation, and vice versa. Blanchard (2000, chapter 8) gives a textbook presentation of the expectations-augmented Phillips curve.

An equation like the expectations-augmented Phillips curve also appears in many recent New Keynesian dynamic stochastic general equilibrium models. In these macroeconomic models with sticky prices, there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the New Keynesian Phillips curve. Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that incorporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler (1999) and Blanchard and Galí (2007).

Answer 3

1.)The Phillips curve represents the relationship between the rate of inflation and the unemployment rate. Although several people had made similar observations before him, A. W. H. Phillips published a study in 1958 that represented a milestone in the development of macroeconomics. Phillips discovered that there was a consistent inverse, or negative, relationship between the rate of wage inflation and the rate of unemployment in the United Kingdom from 1861 to 1957. When unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly. The only important exception was during the period of volatile inflation between the two world wars.

2. and 3) I think it does apply and I can see it happening right now. Refer to answer 1. last sentence. Because as you can see there are exceptions, but the majority of the time it does apply.

4.) Free thinker, so-called liberal

Answer 4

Me=Lib

1) The inverse realtionship between inflation and unemployment.
Essentially the higher the inflation, the lower the unemployment becasue there is more currency in play.

2) It depends on how you measure both. The US doesn't count unemployment if you're unemployed for more than 6 months. It also uses artificial means to control inflation.
In theory, it's pretty solid but most economists don't use it anymore. It's a little simplistic and outdated..

3) See above.

4) Liberal libertarian.

Answer 5

hey, that's like the smartest question ever asked on yahoo Answer. i think. props to you, i have 3/4ths of a poli. sci. degree and i'm pretty stumped (maybe because i suck at economics).

the Phillips curve was Mr. Phillips way of saying that whenever unemployment rates are low, inflation rises and wages and costs fluctuate too much. and vice-vera. the problem with this is that there is also this thing called stagflation that can occur. this is when both unemployment rates and inflation are high which would make mr. phillips theory kind of wrong because it doesn't address stagflation.

i'm an anti-federalist libertarian. and that's the best i can do with that.

Answer 6

1. It's a relationship between unemployment and inflation. Basically, lower unemployment means higher inflation.

2. I think it needs a 3rd input, productivity. If productivity is rising, it negates some of the inflation pressure.

3. The problem with the 70's, was that Carter was printing way too much money, thereby increasing the pool of money too fast. That only results in high inflation. You can see that in countries like Zimbabwe right now.

4. I would describe myself as a conservative libertarian.

Answer 7

1. An economic theory (see Wiki for analysis from Liberal perspective).
2. Depends on who you believe. Liberals believe a job is an entitlement. Conservatives believe we create our own wealth, through initiative, competition and the least governmental interference.
3. Basically there will always be a certain number of unemployed people, because of the number of people needed to fill jobs (and transitions, based on success of employer). This is why Conservatives do not oppose Unemployment Compensation. But it is transitional in nature. Make up your own mind about the 1970's, I am tired of the sexism and racism lies. I was here.
4. Conservative.

Answer 8

1) Its the relationship between unemployment and inflation.

2/3) In college I thought so, under the current conditions of nearly full employment but a drop in real wages earned, I don't agree. I also think Phillips didn't include a significant factor in modern economics--the cost of petroleum.

4) Liberal.

Answer 9

-The Phillips curve illustrates the relationship between inflation and unemployment in an economy.
-He was wrong
-There was no overall relationship between inflation and unemployment.
-Moderate leaning to left

Answer 10

#1. I know nothing! See Hogans Heroes Sgt. Schultz for more of this.
#2. Maybe, maybe not.
#3. Why not? This should be self-explanatory.
#4. Classical Conservative. In case you've missed the distinction there is a difference between Classical Conservatives and Neo-Cons.

Neo-Cons are simply one step away from fully blown liberals aside from a handful of issues such as abortion and homosexuality. The only difference between a neo-con and a liberal is where the money is spent but spend it they will. Prime example of a neo-con is President Bush. More spending, and more deficit, spending than even Slick Willy ever had a wet dream over.