Question

A.W. Phillips created the Phillips curve and developed it into an economic theory in which unemployment and inflation are inversely related. The Phillips curve illustrates the relationship between the level of unemployment and the rate of wage growth, with wage growth serving as a stand-in for inflation. The rate of inflation rises as unemployment decreases. As a result of the rate of inflation adjusting to new pressure of demands brought about by wage increases, there is no change in real values (Phillips 1958). The key benefit of Phillips’s curve is that it can be used to solve the problem of choosing the best inflation and unemployment combination. Furthermore, it employs the impassion bend method to look at the unemployment blend. Using this theory demonstrates that lower inflation can only be achieved at the expense of higher unemployment, and higher inflation can only be achieved at the expense of lower unemployment (Phillips 1958). However, some of the key criticisms of the Phillips curve are that it disregards the part of the cash supply in creating inflation. Beneath the amount hypothesis of cash, cost levels are impacted by the amount of cash circulating within the economy. The fundamental faultfinders of the Phillips curve frequently say that it faults development for expansion and impacts arrangement without considering other causes of expansion. The Phillips curve suggests that financial development is essentially inflationary (Forder 2010). The theory of the new Classical school of thought is based on market-clearing models, where demand and supply quickly adjust under the presumption of flexible wages and prices. Market-clearing models, according to the new Keynesian school of thought, are insufficient to explain short-term economic swings. They thus build their models on stable wages and prices, which also account for the existence of involuntary unemployment (Wilson 1986; Mankiw 2014). On the other hand, in explaining aggregate variations in terms of microeconomics underpinnings, the new Keynesian school of thought economics differs from the new classical economics. The dynamics at play are explained by the new Classical school in terms of the deliberate decisions made by people and businesses (Mankiw 2014; Mihalache and Bodislav 2019). However, modern Keynesian research shows that enterprises and households do not coordinate their decisions without incurring costs, and coordination failure is caused by coordination costs (Mihalache and Bodislav 2019). According to Okun’s law, depending on the nation and period under consideration, a unit rise in cyclical unemployment is connected with two percentage points of negative growth in real GDP. There is a positive relationship between output and employment because a country’s output is dependent on the labour it has employed, which also explains why there is a negative relationship between output and unemployment (Elhorst and Emili 2022.provide in precise form

Answer 1

A.W. Phillips introduced the Phillips curve, showing an inverse relationship between unemployment and inflation. Critics argue it overlooks the role of money supply in inflation.

What constitute the Classical, Keynesians, and Okun's views?

The new Classical school emphasizes market-clearing models with flexible wages and prices, while the new Keynesian school incorporates stable wages and prices, accounting for involuntary unemployment. New Keynesians argue that market-clearing models inadequately explain short-term economic fluctuations. Unlike new Classical economics, modern Keynesian research recognizes coordination costs, asserting that households and firms do not coordinate decisions seamlessly.

Okun's law states that a unit rise in cyclical unemployment is linked to a two-percentage-point decrease in real GDP growth, varying by country and time period. This stems from the positive correlation between output and employment, resulting in a negative relationship between output and unemployment.