optimizing


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Fig. 137 Optimizing. The Phillips curve is drawn as P. The economic welfare of society is represented by a family of INDIFFERENCE CURVES IC1, IC2, IC3, IC4, each indicating successively higher levels of economic welfare as the origin, O, is approached. The optimum point is at the origin, because here full employment and complete price stability are theoretically simultaneously attained. However, the Phillips curve sets a limit to the combinations of U and I that can be achieved in practice. Given this constraint, the task of the authorities is to select that combination of U and I that maximizes society's economic welfare. This occurs at point X, where the Phillips curve is tangential to indifference curve IC3 .

optimizing

the maximization of society's economic welfare in respect of the macroeconomic objectives of FULL EMPLOYMENT, PRICE STABILITY, ECONOMIC GROWTH and BALANCE-OF-PAYMENTS EQUILIBRIUM.

The essence of this approach can be illustrated, to simplify matters, by reference to the PHILLIPS CURVE‘trade-off between unemployment (U) and inflation (I). The Phillips curve in Fig. 137 shows that as unemployment falls, inflation increases and vice-versa. See MACROECONOMIC POLICY, FIXED TARGETS, INTERNAL-EXTERNAL BALANCE MODEL.

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