Comment on the following: “Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995.”

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Comment on the following: “Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995.”

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Comment on the following: “Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995.”

Answer & Explanation (1)

Explanation
Philips curve represents a negative relationship between inflation and unemployment. The higher wages in an economy with low unemployment are believed to push up the prices leading to higher inflation and vice-versa. The relationship was observed in Country U for periods 1960-2000. But the Philips curve seemed to have disappeared in the period 2000-2017. No negative correlation was observed in this period. There have been periods with high unemployment accompanied by high inflation (stagflation).

Sample Response
The dispute is over the relevance of the Philips curve in the current economy. Few economists still believe that there is an inverse relationship between inflation and unemployment (as depicted by the Philips curve), whereas some economists do not assume a definite relationship between the two, taking into consideration the fact that periods with stagflation have been observed in the past.

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