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Help me out - increase inflation to get more employment?

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Wheylous posted on Sun, Oct 14 2012 5:23 PM

I know it's the short run Phillips curve. Here is an article from today:

http://news.yahoo.com/federal-flirting-higher-inflation-110531528--business.html

Risking the wrath of politicians and the central bank's hard-won reputation for keeping prices stable, three top Fed officials are touting plans for boosting employment that explicitly allow for inflation to run above the Fed's 2.0-percent goal.

I thought that Keynesianism taught that price inflation cannot happen until there is full employment? So how come they're "letting" CPI rise so that they get more employment?

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Winder replied on Sun, Oct 14 2012 5:38 PM

They are talking about real inflation, not CPI.

Wages are sticky.  They don't fall when the market falls for a lot of reasons.  So instead of slashing wages and causing a rebellion, the central bank resorts to inflation which devalues the wages and makes a county more competitive in the global market.  

Workers still make the same money, but that money is less valuable.  It is a way of slashing wages to become more competitive, without the public uproar.  People are mostly economic idiots.  They don't realize what is happening.  

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Real inflation?

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Winder replied on Sun, Oct 14 2012 6:05 PM

The Consumer Price Index (CPI) is not inflation.

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"money is less valuable"

This is true.  It's a bit of a strange thing to say that the CPI is not inflation, of course it isn't, it's a tool used to measure the effects of inflation. Ergo when one says that the CPI is rising it shows one thing: a rise in inflation/decline in purchasing power - is there where the confusion is stemming from?

Now again, what do you define as 'real' inflation?

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I meant price inflation. Price inflation cannot happen until full employment, right? Well, then why are we seeing price inflation without full employment?

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Price inflation cannot happen until full employment, right?

Wrong. Just because full employment is argued by Keynesians to lead to inflationary pressures, it does not necessarily follow that the only cause of inflation is full employment. There is cost-push inflation as well as the demand-pull inflation you are talking about. Also, a devaluing of the currency by printing money will make imported goods more expensive.

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I'll read up on it.

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Jargon replied on Mon, Oct 29 2012 1:29 AM

How the hell can one claim that price-inflation doesn't occur until full employment, when Keynes himself admits that the ability of printing money to reduce unemployment lies in the lowering of real wages? How are Keynesians defining inflation here?

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Anyone?

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Interesting question. First off, where does Keynes say that the unemployment is lowered because of the lowering of wages? Scanning my textbook, the SRPC works by shifting demand right.

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Well it's tricky, because in his GT he claims that the most direct cause of employment/unemployment is the rate of interest (Hazlitt points out: why not the price of labor, i.e. wage rates), but then in another place of GT he admits that stimulus would reduce unemployment because it was a more politically palatable way of generally reducing real wages.

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