Phillips/Philosphy

Recession

Not spending enough

Deficit: Government spending is high and taxes are low, leading to negative economic growth and increased national debt.

Balance annually philosophy in recession

• By end of the year, G has to equal T

• G must be be cut and Taxes raised

• If G decreases and T increases economy contracts

• Economy goes down even more (resulting in reduced public services and potential job loss.)

• Cyclical affect

Balance over business philosophy in recession 

• Government increases G, T decreases

• Spending and investing are encouraged.

• The economy becomes less extreme

• Countercyclical

The same goes for functional finance philosophy.

Long run

Prices and wages adjust fully

Short run

Prices and wages do not adjust fully to change.

Self-correcting mechanism

An economy has the ability to return to full employment on its own after a disturbance, through adjustments in prices and wages.

Ex: Recession

• people worry about unemployment

• people will be willing to work for lower wages

• Production costs will decrease and eventually the economy will start moving upward

Phillips curve

There is an observed negative relationship between inflation and unemployment. 

If inflation was to increase, than unemployment will move in the opposite direction (not always true)

• A decrease in aggregate supply causes shifts outward, leading to both high inflation and high unemployment 

• Increases in aggregate supply cause the Phillips curve to shift inward, which leads to inflation and unemployment  going down 

Shifts in the aggregate demand cause shifts along the the Phillips curve