This document discusses inflation, unemployment, and the Phillips curve relationship between the two. It defines inflation as a rise in the general price level and identifies different types of inflation including demand-pull, cost-push, and stagflation. Causes of inflation like increases in costs, money supply, and aggregate demand are explained. Methods for controlling inflation including monetary, fiscal, and other supply-side policies are outlined. The Phillips curve relationship is introduced as showing an inverse relationship between inflation and unemployment, though this broke down in the 1970s. Factors like inflation expectations, supply capacity and the non-accelerating inflation rate of unemployment (NAIRU) are discussed in relation to the Phillips curve.

2. introduction
• .INFLATION“ Inflation is nothing more than a sharp upward
rise in price level.” Too much money chasing, too few goods.”
Inflation is a state in which the value of money is falling i.e.
price are rising.
• 3. KINDS OF INFLATION On the basis of rate of inflation On the
basis of degree of control On the basis of causes Others.
• CAUSES OF INFLATION Demand pull inflation Cost push
inflation.
• HOW TO CONTROL INFLATION Monetary Measures Fiscal
Measures Other Measures.

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4. Inflation and unemployment

5. Inflation and unemployment
 Inflation & Phillips curve: The inflation rate is the percentage change
in the price level. The Phillips Curve shows the relationship between
the inflation rate and the unemployment rate.
 Causes of Inflation: Demand-pull inflation is inflation initiated by
an increase in aggregate demand. Cost-push, or supply-side,
inflation is inflation caused by an increase in costs
 Stagflation: Stagflation occurs when output is falling at the
same time that prices are rising. One possible cause of
stagflation is an increase in costs.
 7% becomes the natural rate in this case. Whenever unemployment
rate is pushed below natural rate , wages increase, pushing up costs.
This leads to a lower level of output which pushes unemployment
back to the natural rate
 CYCLICAL UNEMPLOYMENT this type of unemployment may be
widespread across a range of industries and sectors Keynes

6. HOW TO CONTROL INFLATION



Monetary Measures
Fiscal Measures
Other Measures
MonetaryMeasures
• Credit Control
• Demonetization of Currency

7. FISCAL MEASURES
•
•
•
•
•
•
•
•
•
•
Reduction in Unnecessary Expenditure
Increase in Taxes
Increase in Savings
Surplus Budgets
Public Debt
To Increase Production
Rational Wage Policy
Price Control
Consumer Price Index
WholesalePriceIndex
OTHER MEASURES
• To Increase Production
• Rational Wage Policy
• Price Control

8. HOW IS IT MEASURED?
Consumer Price Index
Wholesale Price Index
 Consumer Price Index
• CPI is a measure estimating the average price of
consumer goods and services purchased by households.
• CPI measures a price change for a constant market
basket of goods and services from one period to the next
with in the same area(city, region, ornation)
• It is a price index determined by measuring the price of a
standard group of goods meant to represent the typical
market basket of a typical urban consumer. The percent
change in the CPI is a measure estimating inflation.

9.  WHOLESALE PRICE INDEX
• WPI was published in1902, and was one of the economic
indicators available to policy makers until it was replaced
by most developed countries by the CPI market Index in
the1970.
• WPI is the index that is used to measure the change in the
average price level of goods traded in wholesale market.
• Some countries (like India and ThePhilippines) use WPI
changes as a central measure of inflation. However, India
and the United States now report a producer price index
instead.

10. EFFECTS OF INFLATION
 They add in efficiencies in the market, and
make it difficult for companies to budget or
plan long-term.
 Uncertainty about the future purchasing power
of money discourages investment and saving
 There can also be negative impacts to trade
from an increased in stability incurrency
exchange prices caused by unpredictable
inflation.
 Higher income tax rates.
 Inflation rate in the economy is higher than
rates in other countries; this will increase
imports and reduce exports, leading to a deficit
in thE

11. EXAMPLES

Increase

Increase
oil

Increase

Increase
in the price of wheat
in the price of world
in the price of rice
in the price of CNG

12. STAGFLATION
 A condition of slow economic growth and
relatively high unemployment accompanied
by inflation.
 This happened to a great extent during the
1970s, when world oil prices rose
dramatically, fueling sharp inflation in
developed countries.

13. PHILLIPS CURVE

In1958,a New Zealand economist, A.W.H. Phillips
proposed that there was a trade-off between
inflation and unemployment.

The lower the unemployment rate, the higher
was the rate of inflation.

Governments simply had to choose the right
balance between the two evils.

Economies did seem to work like this in the
1950s and 1960s, but then the relationship broke
down.

14. The Phillips curve

15. THE PHILLIPS CURVE
o 1958 – Professor A.W.Phillips
o Expressed a statistical relationship between the
rate of growth of money wages and
unemployment from 1861–1957.
o Rate of growth of money wages linked to
inflationary pressure
o Led to a theory expressing a trade – off between
inflation and unemployment

16. Wage growth %
(inflation)
2.5%
1.5%
The Phillips Curve shows an inverse
relationship between inflation and
unemployment. It suggested that If
governments wanted to reduce
unemployment it had to accept higher
inflation as a trade-off
Money illusion–wage rates rising but
individuals not factoring in inflation on
real Wage rate

17. The phillips curve

Problems:

1970s – Inflation and unemployment rising at the
same time – stagflation

Phillips Curve redundant?
 was it moving?
Or

18. The phillips curve
 Where the long run Phillips Curve cuts the
horizontal axis would be the rate of
unemployment at which inflation was constant –
the so – called Non –Accelerating Inflation Rate of
Unemployment (NAIRU)
 To reduced unemployment
To below the natural rate would necessitate
1 Influencing expectations–persuading
Individuals that inflation was going to fall
2 Boosting the supply side of the economy-increase
capacity(pushing the PC curve out wards)

19. END
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