Phillips curve in the context of "Milton Friedman"

⭐ In the context of Milton Friedman's economic theories, the long-run relationship between inflation and unemployment, as depicted by the Phillips curve, is best described as…

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⭐ Core Definition: Phillips curve

The Phillips curve is a representation of the relationship between unemployment and inflation in the macroeconomy, where a tradeoff between low unemployment and price stability exists. Identified by economist Bill Phillips, the curve shows a relationship between lowering unemployment with increasing wages in an economy. While Phillips did not directly link employment and inflation, this was a trivial deduction from his statistical findings. Classical economists Paul Samuelson and Robert Solow made the connection explicit, followed by the theoretical arguments developed by Milton Friedman and Edmund Phelps.

While there is a short-run tradeoff between unemployment and inflation, it has not been observed in the long run. In 1967 and 1968, Friedman and Phelps asserted that the Phillips curve was only applicable in the short run and that, in the long run, inflationary policies would not decrease unemployment. Friedman correctly predicted the stagflation of the 1970s.

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πŸ‘‰ Phillips curve in the context of Milton Friedman

Milton Friedman (/ˈfriːdmΙ™n/ ; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. With George Stigler, Friedman was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought associated with the faculty at the University of Chicago that rejected Keynesianism in favor of monetarism before shifting their focus to new classical macroeconomics in the mid-1970s. Several students, young professors and academics who were recruited or mentored by Friedman at Chicago went on to become leading economists, including Gary Becker (Nobel Prize 1992), Robert Fogel (Nobel Prize 1993), and Robert Lucas Jr. (Nobel Prize 1995).

Friedman's challenges to what he called "naive Keynesian theory" began with his interpretation of consumption, which tracks how consumers spend. He introduced a theory which would later become part of mainstream economics and he was among the first to propagate the theory of consumption smoothing. During the 1960s, he became the main advocate opposing both Marxist and Keynesian government and economic policies, and described his approach (along with mainstream economics) as using "Keynesian language and apparatus" yet rejecting its initial conclusions. He theorized that there existed a natural rate of unemployment and argued that unemployment below this rate would cause inflation to accelerate. He argued that the Phillips curve was in the long run vertical at the "natural rate" and predicted what would come to be known as stagflation. Friedman promoted a macroeconomic viewpoint known as monetarism and argued that a steady, small expansion of the money supply was the preferred policy, as compared to rapid and unexpected changes. His ideas concerning monetary policy, taxation, privatization, and deregulation influenced government policies, especially during the 1980s. His monetary theory influenced the Federal Reserve's monetary policy in response to the 2008 financial crisis.

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Phillips curve in the context of Classical dichotomy

In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the money value of output and the interest rate. In particular, this means that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation. An economy exhibits the classical dichotomy if money is neutral, affecting only the price level, not real variables. As such, if the classical dichotomy holds, money only affects absolute rather than the relative prices between goods.

The classical dichotomy was integral to the thinking of some pre-Keynesian economists ("money as a veil") as a long-run proposition and is found today in new classical theories of macroeconomics. In new classical macroeconomics there is a short-run Phillips curve which can shift vertically according to the rational expectations being reviewed continuously. In the strict sense, money is not neutral in the short-run, that is, classical dichotomy does not hold, since agents tend to respond to changes in prices and in the quantity of money through changing their supply decisions. However, money should be neutral in the long run, and the classical dichotomy should be restored in the long-run, since there was no relationship between prices and real macroeconomic performance at the data level. This view has serious economic policy consequences. In the long-run, owing to the dichotomy, money is not assumed to be an effective instrument in controlling macroeconomic performance, while in the short-run there is a trade-off between prices and output (or unemployment), but, owing to rational expectations, government cannot exploit it in order to build a systematic countercyclical economic policy.

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Phillips curve in the context of Stagflation

Stagflation is the combination of high inflation, stagnant economic growth, and elevated unemployment. The term stagflation, a portmanteau of "stagnation" and "inflation", was popularized, and probably coined, by British politician Iain Macleod in the 1960s, during a period of economic distress in the United Kingdom. It gained broader recognition in the 1970s after a series of global economic shocks, particularly the 1973 oil crisis, which disrupted supply chains and led to rising prices and slowing growth. Stagflation challenges traditional economic theories, which suggest that inflation and unemployment are inversely related, as depicted by the Phillips Curve.

Stagflation presents a policy dilemma, as measures to curb inflationβ€”such as tightening monetary policyβ€”can exacerbate unemployment, while policies aimed at reducing unemployment may fuel inflation. In economic theory, there are two main explanations for stagflation: supply shocks, such as a sharp increase in oil prices, and misguided government policies that hinder industrial output while expanding the money supply too rapidly. The stagflation of the 1970s led to a reevaluation of Keynesian economic policies and contributed to the rise of alternative economic theories, including monetarism and supply-side economics.

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Phillips curve in the context of Bill Phillips (economist)

Alban William Housego "A. W." "Bill" Phillips, MBE (18 November 1914 – 4 March 1975) was a New Zealand economist who spent most of his academic career as a professor of economics at the London School of Economics (LSE). He invented the Phillips curve relating level of employment and inflation in 1958. He also designed and built the MONIAC hydraulic computer macroeconomic model in 1949.

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LINKED FROM (PARENTS)
← Milton Friedman ← Classical dichotomy ← Stagflation ← Bill Phillips (economist)
LINKS TO (CHILDREN)
Price stability → Bill Phillips (economist) → Unemployment → Inflation → Paul Samuelson → Robert Solow → Milton Friedman → Edmund Phelps → Stagflation →