Macroeconomics Assignment

Macroeconomics Assignment

Macroeconomics Assignment

Answer # 1

Link between Okun's Law, the Phillips Curve and the simple aggregate demand/supply

Okun's law states that the relationship unemployment rising and country's GDP (Gross Domestic Product) declines (Blanchard 1997). It relates to principle with an increasing unemployment by one percent above a natural level, it is followed by two to four percent decrease in Gross Domestic Product from its potential.

Okun's Law - an empirical relationship between the rate of increase in unemployment and the growth rate of GDP in the U.S. early 60's , suggesting that the excess in the unemployment rate by 1% above the natural unemployment rate lowers real GDP compared with the potential (increases the GDP gap ) by 2%. For other countries and under different conditions and for different periods of time, it can be numerically different. In reality, this is not a law, but the trend with a variety of restrictions on countries, regions, and the world at large periods of time (Mankiw 2000).

For each country, depending on the period will be a factor of B. According to it, if cyclical unemployment in the country is not the actual GDP is equal to the potential that is involved in the economy of all possible inputs.

Consequence of Okun's law:

GNP and the unemployment rate in the current period

GNP and the unemployment rate in the base period

Practice shows that the Okun's law is far from always, that is not a universal economic law.

The Phillips curve is a curve that the short-run relationship between inflation and unemployment displays. The curve is named after the economist William Phillips who first examined this relationship. The Phillips curve shows that there is a negative relationship between inflation and unemployment (Blanchard 1997). The curve is important for a number of developments in the economy to understand, including the business cycle.

Highlighted in 1958, the Phillips curve is a graph illustrating an empirical negative (decreasing relationship) between the rates of unemployment and inflation or growth rates of nominal wages. This relationship is explained by the fact that beyond a certain level of unemployment, employees are no longer in a strong position to demand a wage increase, the sharing of productivity gains is then performed for the company.

It derives from the work of economist NZ Alban William Phillips linking unemployment and changes in nominal wages, nominal wage growth is a source of inflation, and because it increases the cost of production companies and those latter are then forced to raise their prices to restore profit margins. It will be improved upon by Modigliani (Abel & Bernanke, 1995).

Given the strong relationship between wages and prices, this curve is often used to represent the relationship between inflation and unemployment. The explanation is that with increasing aggregate demand, the tension on prices is higher and starts to rise, while unemployment decreases. In the short run, when prices fall in real wages (nominal wages usually rise by less than prices). This drop in real wages lowers the cost of labor and firms ...