1945) the main inflation theories were demand-pull and cost-push. The cost-push theory basically emphasized the role of excessive increases in wages relative to productivity increases as a cause of inflation, whereas the demand-pull theory tended to attribute inflation more to excess demand in the goods market caused by expansion of the money supply. A central concept in inflationary theory since the mid-1950s has been the Phillips curve, which relates the level of unemployment to the rate of inflation. The Phillips curve suggests that society can make a choice between various combinations of inflation rate and unemployment level. Many economists, however, dispute whether such a choice really exists, saying that in order to keep unemployment under control it will be necessary to accept continuously increasing inflation. At the same time many other economists dispute whether a stable relationship between unemployment and the level of real wage demands exists. Modern Theories During the last few decades there have been numerous refinements of the Keynesian theory of unemployment. For example, although there is still much disagreement as to the importance of wage rigidity, significant progress has been made in explaining it without recourse to trade union behavior or government regulation. At first it seemed difficult to reconcile the notion of wage rigidity with the usual economist's assumption that people seek to maximize utility or satisfaction and would be willing to accept a lower wage in order to get a job. However, by widening the range of variables over which individuals optimize to include variables such as loyalty and self-respect, it has become easier to reconcile labor market disequilibrium with the usual assumptions of optimizing behavior. Macroeconomic theories regarding the way that the determinants of total final demand operate form the basis of large macroeconomic models of the economy that are used in economic forecasting...
