What is Inflation and how it cause
Inflation is a rise in prices, leading to decline in the purchasing power of a country. Inflation is a normal
economic development, as long as the annual percentage remains low, once the percentage rise in
pre-determined level, it is considered inflationary crisis.
There are many causes of inflation, which depends on many factors. For example, inflation may occur,
excessive government printing money to deal with the crisis. Therefore, the price will eventually rise to
a very high speed to keep up with the currency surplus. This is called demand-pull, because the price is
high demand forced upward.
Another common cause of inflation is to increase the ...view middle of the document...
including voluntary unemployment causes, and technological change.
The natural rate of unemployment was popularized in large part by American economist Milton
Friedman in the 1960s. Economic theory before the 1960s, high inflation generally associated with low
unemployment, called the Phillips curve correlation. Although Phillips curve implies that the
government can manipulate trading low unemployment and low inflation economy in the 1960s and
1970s, both high inflation and high unemployment. This phenomenon, known as stagflation, leading
most economists rebuke long-term relationship between inflation and unemployment. In contrast, the
amount of Friedman's natural rate of unemployment will always exist in the economy.
Natural rate of unemployment, including unemployment, due to geographical transition, technological
change, as well as job seekers and job opportunities for volunteering mismatch between. All of these
factors will always exist in the real world economy to some extent. Economists tend to disagree with
the degree of the natural rate of unemployment will exist, but rarely claim that these factors can be
Relationship with Phillips Curve
Phillips curve is an inverse relationship between the rate of unemployment and the rate of inflation in an economy. The original curve shows a negative correlation between changes in money wages and
unemployment between. Later, it shows that there is a permanent and stable relationship between
inflation (price level) and unemployment. This means that the government can control unemployment
and inflation monetary policy. For example, fiscal policy can be used to stimulate the economy, improve
GDP and reduce unemployment. Move along the Phillips curve, which will lead to higher inflation,
enjoying the lower cost unemployment.
However, stagflation (high levels of inflation and unemployment in this case are experienced), in the
1970s, the modern Phillips curve is derived. Short-and long-term relationship between inflation and
unemployment, it distinguishes between. Bend is also known as the expected short-term Phillips curve,
because it changed when inflation is expected to rise. In the long run, however, monetary policy can
not affect unemployment, so it can be the natural rate of unemployment in the line to prove by a
vertical line cutting. This is why monetary policy is neutral in the long run, or in other words, there is
no reason to weigh the long-term between these two variables.
On the other hand, there is still volatile in the short term, and by increasing permanent inflation, and
vice versa power still can temporarily reduce unemployment.
In the short run Phillips curve trade-off can be trade-offs between price and output can be understood.
In the short term, we have the output level (upward-sloping aggregate supply) fluctuations. Assuming
people a positive impact on aggregate demand action output is higher than the natural rate...