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Neo-Keynesian Approach to Inflation: The Phillips Curve

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 …

Decomposition or sources of high-power money

Decomposition or sources of high-power money (H) with the help of the balance sheet identity of the central bank.
High-power money (H) is the currency (notes, coins) produced by the central bank that consists of the currency (C) held by people in their hands or pockets, total cash reserve (R) of BFIs and other deposits of government, government enterprises and foreign offices (OD) with the central bank. i.e H = C + R + OD It is called high-powered money as on the basis of which all BFIs create money in the form of demand deposits (DD) under the credit creation process (CC). There are many sources of (H) that can be decomposed with the help of the balance sheet identity of the central bank i.e Total assets = Total liabilities             ML + NML = FA + OPA             ML = FA – NML + OPA             ML = FA – (NML - OPA)             ML = FA – NNML Where, ML = Monetary liabilities NML = Non-monetary liabilities OPA = other physical assets FA = Financial assets NNML = Net non-monetary liabilities H …

Keynesian version on money demand

Keynesian version / Theory on money demand
Definition of money demand
According to J.M. Keynes, money performs both functions of medium of exchange and store in value. Under the medium of exchange, Md (where Md= money demand) is for transaction of various goods and services. Similarly under store in value, Md is for securing purchasing power in the market, to be wealthy in the society, to take precaution in the future rainy days and further income generation by investing it on various financial assets that can easily be converted into cash at any time. Hence, money is demanded by people with three different motives like:           a.Transaction motive (Mdt)… for goods and services           b.Precautionary motive (Mdp)           c.Speculative motive (Mds)… for bills and bonds So, the total money demand (MdT) = (Mdt + Mdp + Mds)
a. Transaction money demand (Mdt)
For consumers it depends upon size of income accumulation of wealth, frequency of receiving income in a given period of time, spending…