You have heard this term before but you didn't know what is it,let's ask wiki!
Easy Phillips curve:Simplifying 4 thousand words of that wiki article, this curve shows correlation between unemployment and the rate of inflation. It was made by Alban William Phillips who studied the relationship between rate of change of money wage rates and unemployment. This curve shows that there is a trade-off between inflation and unemployment. It can be simply explained by the fact that if there is high unemployment the wages are low and therefore the inflation rate is low and vise-versa.
Complicated Phillips curve:
Most of the economists think that Phillips curve is too simplistic and can't explain real world problems and trade-offs. So another theory was invented.It was called NAIRU or Non-Accelerating Inflation Rate of Unemployment. It explained why stagflation may happen.
So on this graph we can see ordinary Phillips curve and a long run Phillips curve.The theory says that if the unemployment is at point A then there will be a stable rate of inflation but if policy makers decide to decrease unemployment in the short-run this will lead to an increase in the rate of inflation and in the long run increase of the unemployment as well and so stagflation occurs. This term comes from a believe that if the unemployment is below NAIRU then inflation is accelerating and when unemployment greater than NAIRU inflation is slowing.
Nowadays some economists refuse to accept these theories because they may not work in some cases such as in the USA during 1990.
1. How can you have high inflation and high unemployment at the same time?
ReplyDelete2. If inflation is high won't that make exports uncompetitive and thus unemployment rises, not falls?
3. If unemployment is low then surely a lot is being supplied and thus supply shifts outwards - so why is there inflation?
4. If inflation falls then exports become competitive and thus unemployment falls - doesn't it?
5. What is the expectatations augmented Phillips curve and what is money illusion?
6. What is the rational expectations curve?
7. Does the Phillips curve trade-off still apply?