Unchecked open inflation ultimately leads to hyperinflation. In other words, it provides a guideline to the authorities about the rate of inflation which can be tolerated with a given level of unemployment. “The analysis of the inflationary gap in terms of such aggregates as national income, investment outlays and consumption expenditures clearly reveals what determines public policy with respect to taxes, public expenditures, savings campaigns, credit control, wage adjustment—in short, all the conceivable anti-inflationary measures affecting the propensities to consume, to save’ and to invest which together determine the general price level.” The Phillips curve examines the relationship between the rate of unemployment and the rate of money wage changes. Examples. more than a three-digit per annum. FE is the full employment curve. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people. Oligopolist and monopolist firms raise the prices of their products to offset the rise in labour and production costs so as to earn higher profits. First, on the basis of the change in the real value of such factor incomes as wages, salaries, rents, interest, dividends and profits. One of the important causes affecting the supplies of goods is the shortage of such factors as labour, raw materials, power supply, capital, etc. The curve R illustrates running inflation showing a rise of about 100 per cent in ten years.
It is to be noted that PC is the “conventional” or original downward sloping Phillips curve which shows a stable and inverse relation between the rate of unemployment and the rate of change in wages. The expansion of the private sector also tends to raise the aggregate demand. It will control wages and at the same time increase productivity, and hence increase production of goods in the economy. In an economy having price, wage and cost inflations, aggregate demand falls below full employment level due to the deficiency of demand in some sectors of the economy. This is because of the fall in the value of money. They, therefore, do not get hurt by the inflation. As a result, some persons gain while others lose. If the stress is on the production of comforts, luxuries, or basic products to the neglect of essential consumer goods in the country, this creates shortages of consumer goods. But before we analyse them, it is instructive to know about the meaning of inflation. Similarly the rentier class consisting of interest and rent receivers get fixed payments. This is because, “when the demand for labour is high and there are very few unemployed we should expect employer to bid wage rates up quite rapidly.” The second factor which influences this inverse relationship between money wage rate and unemployment is the nature of business activity. This is because the value of money is less than when they borrowed the money. But what causes the Phillips curve to shift over time is the expected rate of inflation. The main two types of inflation are. Rapidly rising prices create uncertainty among producers who indulge in speculative activities in order to make quick profits. Among these groups, the recipients of transfer payments belong to the lower income group and the rentier class to the upper income group.
Given a constant average propensity to save, rising money incomes at full employment level would lead to an excess of demand over supply and to a consequent inflationary gap. Corruption spreads in every walk of life. When prices rise or the value of money falls, some groups of the society gain, some lose and some stand in between. It is a paradoxical phenomenon where the economy expedience’s stagnation as well as inflation. But economists do not agree with Friedman. The vertical long-run Phillips curve implies that all expectations are satisfied and that people correctly anticipate the future inflation rates. Is a situation when prices are raised deliberately in order to encourage economic activity.