Expectational Phillips Curve

And finance Allah shmoop What is the Phillips curve No

not the filler up curve or fill up curve which

tracks relationship between cholesterol levels and eating high volumes of

cheap fried chicken's the Phillips Curve It's an economic model

that describes an inverse relationship between unemployment levels and the

amount of inflation in an economy Right And you think

about this Okay so if there's a lot of inflation

means economy is really hot And so employment levels are

probably very high Well inverse relationship That's what Philip's curve

has or shows It means the two forces move in

opposite direction like as the amount you talk about economics

goes up the number of dates you get goes down

Okay well let's apply that principle to the Phillips curve

Here you have the unemployment rate They're a figure that

tracks the percentage of the population who are looking for

work but cannot find a job Ah high unemployment rate

means a lot of people are out of jobs It's

a sign that the economy is weak Bread lines hoovervilles

thirty year old's moving back in with their parents You

know all kinds of disasters Meanwhile a low unemployment rate

means that nearly everyone who wants a job has one

You know it's a good sign for an economy but

well then you have inflation Usually inflation remember is a

measure that shows the rate at which prices are rising

across an economy High inflation prices rising quickly Things get

more expensive It's tough on old people particularly old people

Consumers Yeah each time prices go up people can't afford

fewer pork rinds or superhero bobble heads or whatever they're

looking to buy for ten bucks on the other side

There's low inflation like when prices air rising slowly if

at all A little bit of time Relatively stable currency

relative to everything else Easy for people to buy stuff

And businesses can make long term spending plans without worrying

a lot about their currency being valued last in the

future and all that stuff So under the Phillips curve

theory unemployment and inflation have an inverse relationship When unemployment

is high inflation will be low Meanwhile when inflation is

high unemployment will be low writes a teeter totter Well

the Phillips curve is named after an economist named William

Phillips He first published his theory in the nineteen fifties

well fun facts about William Phillips He was born in

New Zealand and his real first name was Alban Okay

moving on the mechanics behind the Philip's curve Work like

this There was a high level of aggregate demand in

an economy meaning that people have cash and are looking

to buy stuff all the pork rinds and superhero bobbleheads

and you know whatever To get everybody all the stuff

they want to buy Companies have to hire more people

Teo make this stuff Unemployment rates fall is Mohr People

get hired And meanwhile the additional demand drives prices higher

Rising prices Yeah that's the definition of inflation Inflation high

unemployment low Phillips curve in action All right now the

other side aggregate man is low People don't have money

to buy stuff People have to ration their intake of

pork rinds and cut back on their purchase of superhero

bobbleheads Companies don't need as many workers they don't hire

They even lay people off Unemployment then gets high Meanwhile

without much demand there's no upward pressure on prices and

inflation is low Yet Philip's curve in action again Well

the Phillips curve informs a lot of economic decision making

It gets a lot of use in the real world

So let's just take the United States is an example

Here in the U S The main organization in charge

of keeping the economy humming is the Federal Reserve It

sets what's called monetary policy basically deciding how much money

there is and how fast it's allowed to move through

the economy The Fed has two stated goals Keep inflation

under control and keep unemployment as low as possible Well

you'll notice the Phillips curve problem here The feds trying

to have it both ways Inflation low unemployment low under

the Phillips curve theory Well you can't really have both

at once So in practice the Fed is constantly adjusting

to stay in the sweet spot They're like trying to

keep the perfect water temperature in the shower When the

economy is sluggish and unemployment is high the Fed will

launch some inflationary policies like good While turning up the

hot water They lower interest rates and put more money

into the system It's then easier to borrow money and

easier for companies to invest right lower interest rates of

capital Cheaper unemployment then goes down But inflation starts to

rise well Once inflation gets a little too strong the

Fed will crank up some cold water higher interest rates

borrowing and investing then get more expensive less money moving

around inflation then comes under control But there's a risk

that unemployment then starts to rise But the Fed is

constantly going back and forth Keep a reason will bounce

on the film's curve Tradeoff This management is complicated by

the fact that the bed policies take a little time

to work their way through the system Right there's lag

when Fed sets policy and then he actually see the

numbers in actual data that's coming through the pipeline The

Fed doesn't just wave a wand or push a button

and bam the economy is fixed right takes time So

there's a problem here It's not clear that Philip Curve

works in the long term There's a fair amount of

evidence that it works under most conditions in the short

term But in the long run many economists feel the

Phillips curve starts to fall apart In this anti Phillips

conception Well the rate of inflation is decided by monetary

issues The amount of cash floating around in an economy

unemployment doesn't really play a role Meanwhile long term employment

is the result of economy wide levels of supply and

demand for human labor It means you can't just inflate

your way out of every high unemployment situation It's a

bummer If you happen to run the Fed it means

situations can come up for which there's no clear Phillips

playbook Well the U S learned this lesson the hard

way in the nineteen seventies the time of leisure suits

and you know getting into drunken fights with Keith Richards

at Studio fifty four and the time of something known

as stagflation Well during this time the U S Economy

experienced stagnant growth like barely any complete with relatively high

unemployment mean while at the same time the country saw

high inflation rates high unemployment high inflation rial Philip's curve

conundrum We'll eventually the feds solved the problem by jacking

up interest rates The move got rid of the inflation

but it also contributed to basically a recession Once inflation

slowed the economy was able to resume growth again And

we got the boom years of the Reagan nineteen eighties

aerobics outfits and boom boxes Yeah and Keith Richards probably

still getting in drunken fights except maybe now they happened

at the mall or the nurse's office or something like 00:06:14.861 --> [endTime] that