ASSIMENT ABOUT :

Modified Phillips Curve , expectations-augmented Phillips curve and accelerationist Phillips curve.

First ! , my concept for phillips curve :

The Phillips curve is an economic model, named after William Phillips, that
predicts a correlation between reduction in unemployment and increased rates
of wage rises within an economy.[1] While Phillips himself did not state a linked
relationship between employment and inflation, this was a trivial deduction
from his statistical findings. Paul Samuelson and Robert Solow made the
connection explicit and subsequently Milton Friedman[2] and Edmund
Phelps[3][4] put the theoretical structure in place.

A)Modified Phillips Curve :

Two critical properties can be noted from modified version of Phillips Curve:
Expected inflation is passed one for one into actual inflation. Unemployment is
at the natural rate when actual inflation equals expected inflation.
Modified Phillips Curve The simple Phillips curve relationship fell apart after the
1960s, both in Britain and in the United States. Following figure shows the
behaviour of inflation and unemployment in the United States over the period
since 1960. The data for the 1970s and 1980s do not fit thesimple Phillips curve
story.
The possible explanation of the divergence between the two graphs is the
concept of expected or anticipated inflation. When workers and firms bargain
over wages, they are concerned with the real value of the wage, so both sides
are more or less willing to adjust the level of the nominal wage for any inflation
expected over the contract period. Unemployment depends not on the level of
inflation but, rather, on the excess of inflation over what was expected.
For example: let us assume that employer of Company X announces a 3
percent increase in wages. 3 percent increase appears to be a nice increase.
Further let us assume that inflation has been running at 10 percent and is
expected to continue at this rate. If cost of living rises at 10 percent while
nominal wages increase only by 3 percent, the standard of living of the
employees of Company X is actually going to fall, by about 7 percent (10
percent – 3
B .Expectation Augmented Phillips curve .
The expectations-augmented Phillips curve assumes that if actual inflation
rises, expected inflation will also increase, and the Phillips curve will move
upwards so as to give the same expected real wage increase at each
employment level.
What is the expectation augmented Phillips curve equation?
where π is inflation, πe is expected inflation, u is unemployment, u∗ is the
natural rate, and ǫ is an error term. This equation is commonly called the
expectations-augmented Phillips curve. t ) + ǫt
What is the expectations-augmented Phillips curve investopedia?
Expectations-Augmented Phillips Curve Phelps's model shows how monetary
policy can create a short-run tradeoff between inflation and unemployment (a
downward-sloping Phillips curve), but in the long run, the Phillips curve is
essentially vertical at the natural rate of unemployment.

C ) accelerationist Phillips curve:

According to the accelerationist Phillips curve, a recession causes inflation to
fall lower and lower as long as unemployment exceeds the natural rate. With
anchored expectations, a period of high unemployment implies a low level of
inflation but not an ever-falling level.
How does the original Phillips curve differ from the accelerationist Phillips
curve?
Explain how the original Phillips curve differs from the expectations-augmented
Phillips curve (or the modified, or accelerationist Phillips curve). Original
Phillips curve stated an increase in unemployment led to lower inflation. But
modified Phillips curve states increased unemployment leads to decreasing
inflation.

By: MUSTAFE CABDIRASHIID CAALIN ID:6555

ALLA MAHAD LEH .