Inflation, Recession and Unemployment

I. ANALYSIS OF THE INTERRELATIONSHIPS In 1958, Professor A. W. H. Phillips set out empirical evidence to support the proposition that a significant relationship existed between the change in money wages and the level of unemployment.1 This proposition held that higher wages would be accompanied by lower unemployment. This relationship became known as the Phillips Curve, and it implied that a low rate of price inflation and a low rate of unemployment were inconsistent. This implication of the Phillips Curve led to the axiom that a tradeoff existed between inflation and unemployment. Thus, if the government acted to control inflation higher unemployment could be expected, and, conversely, if the government acted to boost employment, higher inflation could be expected. Employment and unemployment were associated with the level of economic activity. Thus, high levels of employment were associated with economic growth, while high levels of unemployment were associated with economic recession. Thus, a tradeoff relationship was also postulated between inflation and the level of economic activity. If the government acted to control inflation, a drop in the level of economic activitya recessioncould be expected. On the other hand, if the government acted to boost the level of economic activity, a higher rate of inflation could be expected.

1R. Rees, Economic Theory, 5th ed. (Harmondsworth, E

. . .
he second term of the Reagan Administration's (19851988), the cumulative deficit was $776.2 __________ 3Calculated from data obtained from: Council of Economic Advisers, Economic Indicators (Washington: U. S. Government Printing Office, July 1988), 32. 4Calculated from data obtained from: Council of Economic Advisers, Economic Indicators (Washington: U. S. Government Printing Office, February 1984), 32. 5Calculated from data obtained from: Council of Economic Advisers, Economic Indicators, July 1988), 32. billiona 28 percent increase over the first term, and a 242.2 percent over the cumulative Carter Administration deficit which, during the 1980 election, was decried by candidate Reagan as being irresponsible, and severely damaging to the economy. Federal budget deficits did not originate with Nixon, Ford, Carter, or Reagan. The last federal budget surplus occurred in fiscal 1969,6 and that is the only one which has been recorded in the past 25years.7 Under Ronald Reagan, however, federal budget deficits spiraled to undreamed of heights, and, many economists think, threaten the future economic stability of the country.8 During the Second World War, the federal budget deficit increased, because
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Approximate Pages = 12 (250 words per page)

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