1.

What is the expectations augmented Phillips curve, and what does it imply about the links of
inflation to the rest of the economy?

Phillips Curve

It is a concept in economics founded by A.W Phillips that states an inverse and stable
relationship between inflation and unemployment. It assumes that economic growth is
accompanied by inflation, leading to job creation and reduced unemployment rates. The earliest
concept suggested that unemployment could be maintained at a lower rate only if policymakers
were willing to pay the price of increased inflation.

Answer to the question

Expectations-augmented Phillips curve is a Phillips curve model that relates the increase in
wages to demand pressure, considering expected inflation. Given the expected rate of price
increase, the Phillips curve perceives increased compensation as an expression of decreased
unemployment rates or increased demand pressure. This model assumes that a rise in actual
inflation increases expected inflation, thus causing the Phillips curve to move upwards to offer
the same real wage increase expected at each employment level. This model implies that there is
no long-run trade-off between inflation and unemployment. An ever-increasing inflation rate is
necessary to attain an unemployment rate below the non-accelerating inflation rate of
unemployment. However, this is thought to be unsatisfactory. Although moderate inflation rates
may result in reasonably little harm, efficient running of the economy is adversely affected by
hyperinflation, which impairs the economic purposes of currency.