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Higher inflation may also damage our international competitiveness. Who will want to buy UK goods when our prices are going up faster than theirs? . Friedman developed this and tested it further. This uncertainty could limit spending and also limit the level of investment. Classical economists suggested that V would be relatively stable and T would always tend to full employment. The conclusion from this was that: M P If the money supply grew faster than the underlying growth rate of output there would be inflation. coming to the conclusion that V and T were both independently determined in the long- run. Inflation would be bad for the economy because of the uncertainty it created.

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but throughout the 1970s they did. However. Friedman then put his mind to whether the Phillips Curve could be adapted to show why stagflation was occurring. the problem that emerged with it in the 1970s was its total inability to explain unemployment and inflation going up together .-3 The Phillips Curve showed a  %27 3-(  . According to the Phillips Curve they weren't supposed to do that.stagflation. Once again the supreme logic of economics comes to the fore! .hence the name 'expectations-augmented' Phillips Curve. and the explanation he came up with was to include the role of expectations in the Phillips Curve .

Friedman argued that there were a series of different Phillips Curves for each level of expected inflation. If people expected inflation to occur then they would anticipate and expect a correspondingly higher wage rise. 9N 4 N 1 CK9N CK=N CKN 1-( .people would anticipate inflation and account for it. Friedman was therefore assuming no 'money illusion' . We therefore got the situation shown below: 0C   J .

If the government insist on trying again the economy will do the same thing (W to X to Y). Any attempt to reduce inflation below the level at U will simply be inflationary. and the government decides   that it wants to lower the level of unemployment because it is too high. For this reason the rate U is often known as the natural rate of unemployment. §o having moved along the Phillips Curve from U to V. and anticipate the inflation. The J . Next time around the firms and consumers are ready for this. but this time at a higher level of inflation. the firms now begin to lay people off once again and unemployment moves back to W. §ay the economy starts at point 0C U. . increase in demand for goods 9N and services will fairly soon 4 begin to lead to inflation. It therefore decide to boost demand by 5%. and so N any increase in employment will 1 quickly be wiped out as people CK9N CK=N CKN realize that there hasn't been a 1-( real increase in demand.

.

.' (1899-1992) *born in Vienna. *passionate opponent to §ocialism and along with another economist called Ludwig von Mises formed the Mont Pelerin §ociety. This society was pledged to give individual the freedom to make their own economic choices and campaigned to make people aware of the dangers of §ocialism. was a great believer in free markets *Nobel Prize in Economics.*3/3 *.

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