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Neo-Keynesian Approach to Inflation: The Phillips Curve

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Neo-Keynesian Approach to Inflation: The Phillips Curve






Generally, Neo-Keynesian macroeconomics has the following four propositions.
i.Private sector is unstable ii.Money in the long run is neutral iii.There exists tradeoff between inflation and unemployment iv.Countercyclical policies are preferable to achieve the macroeconomic stability
Phillips (1958), using the data of Great Britain, innovated the Phillips curve which showed the negative relationship between rate of change in money wage and rate of change in unemployment. The original Phillips curve was just the empirical relationship, however, most influential theoretical interpretation steamed from R.G. Lipsey (1960). The Phillips curve appeared empirically plausible and verifiable explanation of continuously rising money wage, a phenomena which the classical labour market could not explain immediately.
The demand for and supply of labour schedules were assumed to be negative and positive function of money wage respectively. Presence …

The Samuelson and Slow Modification

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The Samuelson and Slow Modification
Samuelson and Slow (1960) modified the Phillips curve so that it represents the relationship between rate of inflation and rate of unemployment. The link between wage inflation and price inflation was established through markup equation which may be stated as below:  P = (1 + a) WN/Y ……………… (1) Where, P = general level of price      W = money wage rate      N = number of employment      Y = real output      a = constant profit margin
In this above equation WN/Y denotes the unit labor cost – the cost of labor per unit of output. Using the concept of labor productivity (p = Y/N) equation (1) can be written as,      P = (1 + a) W/p
Differentiating the equation after natural log transformation we will get,      π = gw – λ ……………….. (2)
Here, inflation rate (π) is equal to difference between rate of growth in money wage rate (gw) and the rate of growth in labor productivity (λ).
Further, let us assume that Phillips curve is of the following form.  gw = πe + bu-1 + βλ…

Monetary Approach to Balance of Payment

Monetary Approach to Balance of Payment – by Harry G. Johnson in 1977

The monetary approach to balance of payment (developed by Harry G. Johnson in 1977) is also known as the ‘Small Country Model of Balance of Payment’ that shows an automatic adjustment between change in money supply (∆Ms) and money demand (∆Md) through the change in the position (deficit/surplus) of Balance of Payment. According to the approach, Balance of Payment is always and everywhere a monetary phenomenon so that there is a significant role of both money supply and money demand in the position of Balance of Payment. The approach is based on given assumptions:

a. The country is small and open economy

b. All countries are functioning with full employment economy

c. There is a fixed exchange rate regime

d. There is no money illusion

e. There is a strong desire of people for adjustment between Ms = Md

f. There is a perfect mobility of goods/s and financial assets from a country to others


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