Macroeconomic Problems and Analysis Essay Example | Topics and Well Written Essays - 1250 words

Macro economicalal Problems and Analysis - Essay Example agree to his published article, Phillips posited that when unemployment rate fell, inflation tended to rise and vice-versa, thus, the apparent get in touch between these economic factors. (Cobham, 1998)However, with the recent economic trends, economists of various countries noted that rugged inflation can, in fact, coexist with low unemployment rate (Oliver, 1999). Such spy trend is deemed to be contrary to the hypothesis of Phillips.This authorship discusses the inflation and unemployment rate trend in Australia from 1994 to 2004. The paper aims to provide an explanation as to why the Phillips Hypothesis is regarded as an insufficient or inapplicable similarly to be used in analysing the relationship between the two economic factors.For over 40 years, the link between inflation and unemployment has been intensely debated upon by economists all over the world (Oliver, 1999). They hypothesis postulated by Phillips has bee n subjected to innumerous criticisms regarding its ability to explain the inflation-unemployment relation. For instance, in the 1970s, the Phillips thin out fell short of elucidating why many countries experienced stagflation - an economic condition characterised by high level of unemployment coupled with high level of inflation (Wikipedia, 2005).With this, new theories emerged to kick downstairs illustrate the observed link between inflation and unemployment levels. One of the most notable is the theory on non-accelerating inflation rate of unemployment (NAIRU) or the natural rate of unemployment. Based on this theory, the short term Phillips curve is negatively sloping showing the inverse relationship between unemployment (on the x-axis) and inflation (on the y-axis). (Samuelson & Nordhaus, 2001)On the another(prenominal) hand, the farseeing run Phillips curve is vertical, wherein only the natural rate of unemployment was consistent with stable inflation rate as expectations of market players change. In this regard, no trade-off is seen between inflation and unemployment in the long run. However, this theory is critiqued callable to the difficulty in determining the natural unemployment rate. (Levacic & Rebmann, 1982)Another theory, which is influential in explaining the inflation-unemployment linkage, is the one postulated by Milton Friedman. He argued that the Phillips curve is formed due to money illusion such that the price inflation fooled businesses into perceiving that there is quest surge. As such, they hire more people, thus, decreasing the unemployment rate. Friedmans theory asserted that inflation tends to precede drops in unemployment quite an than follow it. (Oliver, 1999)Other economists believe that, contrary to Friedmans theory, low unemployment raises bargaining power of workers. Given this, they tend to force for higher nominal wages resulting in cost-push inflation. Employers then would raise prices to remain within targeted profi t level. (Wikipedia, 2005)Inflation-Unemployment relation back - The Case of AustraliaThe theories discussed only addressed scenarios in which stagflation occurs and when inflation and unemployment behave inversely. In the case of Australia and in other OECD countries as well, particularly in the 1990s to early 2000s, the robust output growth and prevailing low unemployment rate are coupled with low inflation. The growing Australian