Stagflation | Economics Help
The relationship between inflation rates and unemployment rates is inverse. .. Stagflation is a combination of the words “stagnant” and “inflation,” which are the . 15 a Stagflation is a combination of inflation and recession. 16 b The recession caused by the supply shock increases unemployment and reduces output. Stagflation is the combination of: The term "stagflation" arose in the s to describe the combination of high and accelerating inflation and high unemployment.
Shifts in aggregate supply
If trade unions have strong bargaining power — they may be able to bargain for higher wages, even in periods of lower economic growth. Higher wages are a significant cause of inflation. If an economy experiences falling productivity — workers becoming more inefficient; costs will rise and output fall. Rise in structural unemployment. If there is a decline in traditional industries, we may get more structural unemployment and lower output. Thus we can get higher unemployment — even if inflation is also increasing.
People may talk about stagflation if there is a rise in inflation and a fall in the growth rate. This is less damaging than higher inflation and negative growth. But, it still represents a deterioration in the trade-off between unemployment and inflation.
Key points A Phillips curve shows the tradeoff between unemployment and inflation in an economy. Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy that shifts the aggregate demand curve to the right.
The other side of Keynesian policy occurs when the economy is operating above potential GDP.
The Phillips curve in the Keynesian perspective
In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy that shifts aggregate demand to the left.
Contractionary fiscal policy consists of tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures. Expansionary fiscal policy consists of tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession.
The discovery of the Phillips curve In the s, A.
Shifts in aggregate supply (article) | Khan Academy
Phillips, an economist at the London School of Economics, was studying the Keynesian analytical framework. The Keynesian theory implied that during a recession inflationary pressures are low, but when the level of output is at or even pushing beyond potential gross domestic product, or GDP, the economy is at greater risk for inflation.
Phillips analyzed 60 years of British data and found the tradeoff between unemployment and inflation described in Keynesian theory, which became known as a Phillips curve. Suppose concerns about the size of the federal budget deficit lead the US Congress to cut all funding for research and development for 10 years.
Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left? Critical thinking questions Imagine that economists expect the labor market to tighten, causing workers' wages to increase. Assuming this is the only development in the labor market, how would it affect the SRAS curve? What if it were also accompanied by an increase in worker productivity?
During the spring ofthe Midwestern United States, which has a large agricultural base, experienced above-average rainfall. Hydraulic fracturing—fracking—has the potential to significantly increase the amount of natural gas produced in the United States.