Phillips Curve - long-runSyllabus: Explain, using a diagram, that the short-run Phillips curve may shift outwards, resulting in stagflation (caused by a decrease in SRAS due to factors including supply shocks).
Syllabus: Discuss, using a diagram, the view that there is a long run Phillips curve that is vertical at the natural rate of unemployment and therefore there is no trade-off between the unemployment rate and the inflation rate in the long run.
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Syllabus: Explain that the natural rate of unemployment is the rate of unemployment that exists when the economy is producing at the full employment level of output.
Be aware of the number of different models you can use to illustrate the Natural Rate of Unemployment:
PPC Diagram showing a production combination on the PPC
Equilibrium in the Labour Market (no excess demand or supply of labour)C
Full Emplyment on an AS/AD Diagram (both neoclassical and Keynesian diagrams show this)
Phillips Curve the Natural Rate of Unemployment is where the Short Run Phillips Curve intersects with the Unemployment Rate axis (This implies there is no excess demand - demand pull inflation- so Keynesians call this level of unemployment the NAIRU rather than the natural rate - NAIRU refers to the Non-Accelerating-Inflation, Rate of Unemployment)
Remember that Full Employment does not necessarily mean 100% employment (in practice it never does) it means there is no demand deficient (cyclical) unemployment - there is still structural and frictional unemployment) - Refer back to page 52.
Some criticisms of the Friedman analysis
- Keynesians would maintain that there is nothing natural about the natural rate of unemployment. There are too many rigidities in modern economies for the markets to operate efficiently and return the labour market back to the so-called natural rate, automatically. The level of employment in the economy is something, which is more often and crucially determined by government policies designed to influence the level of aggregate demand. If inflationary tendencies set in as a result of an expansionary impetus, the rise in prices may be checked through a mainly interest rate policies.
Marxists would maintain that the analysis merely perpetuates
bourgeois ideology in that unemployment is made to appear as something
that is part of the natural order of the universe and as such to be
accepted without question. In Marxist analysis, unemployment is
'natural' only to the economic system known as capitalism. It stems
from the historic tendency of capitalism towards profits crises, and is
necessitated by the desire of the owners of the means of production to
restore profitability and to maintain a reserve army of unemployed.
In a planned socialist society, with the means of production commonly
owned and production undertaken for need, not profit, unemployment
would be unnecessary and indeed irrational.
- Free market analysis places the responsibility for unemployment on workers rather than the system itself.
May 2012 TZ2
2. (a) Explain why governments may pursue the macroeconomic goals of low inflation
and low unemployment.
(b) Evaluate the extent to which the use of expansionary demand-side policies may lead to conflicts between the various goals of macroeconomic policy. [15 marks]May 2007
2. (a) Explain why a government might find it difficult to maintain a low rate of inflation as the economy approaches full employment. [10 marks]
(b) Evaluate the proposition that the priority in economic management should be the maintenance of low unemployment. [15 marks]