Saturday, August 22, 2009

Full Employment and Price Stability

One of the objectives of monetary policy in 1950’s was to have full employment with price stability. But the studies of Phillips, Samuelson Solow and others in the 1960’s established a conflict between two objectives. They suggest that full employment can be attained by having more inflation and that price stability can be achieved by having unemployment to the extent of 5 to 6 percent. Economists do not find any conflict between unemployment and price stability. They hold that so long as there are unemployed resources, there will be price stability. Prices start rising only when there is full employment of resources.

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