Phillips Curves | Macroeconomics | Summary and Q&A

TL;DR

The Phillips Curve shows the inverse relationship between inflation and unemployment in the short run, but this relationship is not as strong in the long run.

Key Insights

• 🏃 The Phillips Curve demonstrates an inverse relationship between inflation and unemployment in the short run, but it weakens in the long run.
• 🧑‍⚕️ In the short run, government interventions like fiscal policy can stimulate aggregate demand and decrease unemployment, but workers eventually adapt to resulting inflation.
• 🧑‍⚕️ Rational workers and informed employers consider real wages when determining the quantity of labor to supply.
• 🏃 Changes in expectations about inflation can shift the short-run Phillips Curve.
• ✋ Stagflation, characterized by high inflation and unemployment, challenges the Phillips Curve's predictive power.
• ☠️ The long run Phillips Curve corresponds to the natural rate of unemployment, and changes in inflation do not affect output or unemployment.
• 🧑‍🏭 Policy changes and factors affecting the labor market can shift the long-run Phillips Curve.

Transcript

in the short run if the average inflation rate is constant the Phillips curve shows an inverse relationship between inflation and unemployment this is the behavior that British economist a W Phillips noted in his initial paper for he analyzed unemployment and inflation data from the United Kingdom from 1870 to 1957 Philips work found that changes i... Read More

Questions & Answers

Q: What did British economist A.W. Phillips discover in his analysis of unemployment and inflation data?

A.W. Phillips found a predictable inverse relationship between unemployment and price inflation in the short run. An increase in unemployment was often accompanied by a decrease in wage inflation.

Q: How can the government reduce unemployment according to the Phillips Curve?

The government can increase spending in sectors like national defense to hire more workers, which would lower unemployment. This would stimulate aggregate demand, but it could also lead to an increase in nominal wages and higher prices.

Q: Why does the inverse relationship between inflation and unemployment only hold in the short run?

In the long run, workers and employers consider inflation when determining wages. Employment contracts are adjusted for inflation, resulting in pay rates aligned with anticipated inflation. This reduces the impact of unemployment on inflation.

Q: What is stagflation, and when did it occur in the US?

Stagflation is a situation of slow or stagnating growth, high inflation, high unemployment, and low consumer demand. It occurred in the US during the 1970s, specifically between 1973-1974 and 1979-1980.

Summary & Key Takeaways

• The Phillips Curve demonstrates an inverse relationship between inflation and unemployment in the short run.

• In the short run, an increase in unemployment leads to a decrease in wage inflation and vice versa.

• However, this relationship is not as strong in the long run, as workers and employers adjust their expectations and consider inflation in employment contracts.