Date of Award

Spring 1981

Document Type

Thesis

Department

Business, Accounting & Economics

First Advisor

Jon Krutar

Second Advisor

Bruce Finnie

Third Advisor

Dennis Wiedmann

Abstract

Stabilization policy has been a major area of economic debate for years. From the classical position of laissez faire, to the Keynesian notion of a "fine-tuned" economy, to the Phillips Curve's menu of choices between unemployment and inflation, the discourse has continued. Recently it appears that economic thought has traveled full-circle to classical theory, as governments' ability to affect the level of economic activity has been seriously questioned. This has been due in part to the apparent demise of the Phillips Curve theory. In this paper, we will trace through the history of American stabilization policy leading to the development of the Phillips Curve theory. Specifically, we will discuss early thoughts pertaining to the relationships between unemployment and inflation as contended by Classical and Keynesian economists. Next, we will explore the nature of Phillips' original theory. Finally, we will bring the theory up to date by discussing various market and labor force changes that have occurred during recent years to distort the original trade-off relationship.

Our basis for the Phillips Curve revision that we present was established through an independent research project (conducted from September 1980 to February 1981) under the direction of Dr. Bruce Finnie, an independent economist working in Helena, Montana. Within the realm of the project, we gathered quarterly data from 1960-1980 for approximately thirty separate variables. By performing various mathematical manipulations, we applied our information to Dr. Finnie's theoretical model to obtain a revised Phillips Curve. Through this study, we hope to elucidate public misconceptions concerning the relationship between unemployment and inflation, and present the concurrent stabilization policy implications.

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