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February 28, 2005

Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) due to such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model.

Another Keynesian concept is partypoker the potential output (sometimes called the "natural gross domestic product"), a level of GDP where the economy is at its optimal level of production, given institutional and natural constraints. This level of output corresponds to the NAIRU or the "natural" rate of unemployment or the full-employment unemployment rate. In this framework, the built-in inflation partypoker rate is determined endogenously (by the normal workings of the economy):

if GDP exceeds its partpoke potential (and unemployment is below the NAIRU), the theory says that, all else equal, inflation will accelerate as suppliers increase their prices and built-in inflation worsens. This causes the Phillips curve to shift in the stagflationary direction, toward greater inflation and greater unemployment. This kind of "inflationary acceleration" may have been seen in the late 1960s in the U.S., when Vietnam war spending (counteracted only by small tax hikes) kept unemployment below 4 percent for several years.

if GDP falls below bicycle casino its potential cardplayer level (and unemployment is above the NAIRU), all else equal inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation: there is disinflation. This causes the Phillips curve to shift in the desired direction, toward less inflation and less unemployment. This disinflation may have been seen in the early 1980s, when Fed chief Paul Volcker's anti-inflation campaign kept unemployment high for several years and at almost 10 percent for two years.

If GDP is equal to potential (and the unemployment rate equals the NAIRU), the inflation rate will not change, as long as there are no supply shocks. In the "long run," most neo-Keynesian macroeconomists see the Phillips Curve as vertical. That is, the unemployment rate is given and equal to the NAIRU, while there are a large number of possible bicycle casino inflation rates cardplayer that can prevail at that unemployment rate.

However, one problem with this theory partypoker for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change due to policy: for example, high unemployment under Prime Minister Margaret Thatcher in the U.K. may have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed, unable to find jobs that fit their skills in the British economy. A rise in structural unemployment bicycle casino implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating partypoker inflation.

Most non-Keynesian theories of inflation can be understood within the neo-Keynesian perspective as assuming that the NAIRU and potential output are both unique and are attained relatively quickly. With the "supply side" at a fixed level, the amount of inflation is then determined by aggregate demand. The fixed supply side also implies that government and private-sector spending are always in conflict, so that government deficit spending leads to crowding out of the private sector and partpoke has no effect on the level of employment. Thus, it is only the money supply and monetary policy that determine the partypoker inflation rate.

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