Answer: In general, a Phillips curve shows a relationship between the inflation rate and the unemployment rate. There is a short-run Phillips curve and a long-run Phillips curve. Moving along a short-run Phillips curve, expected inflation and the natural unemployment rate are constant. The short-run Phillips curve shows the relationship between the inflation rate and unemployment rate: a higher inflation rate results in a lower unemployment rate. The long-run Phillips curve shows the relationship between the inflation rate and unemployment rate when the inflation rate equals the expected inflation rate. Moving along the long-run Phillips curve there is no tradeoff between the inflation rate and the unemployment rate: a higher inflation rate has no effect on unemployment rate, which remains equal to the natural unemployment rate.
The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. According to the Phillips curve, the lower an economy's rate of unemployment, the more rapidly wages paid to labor increase in that economy.
The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.
In economics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.
While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.
In 1968, Milton Friedman asserted that the Phillips Curve was only applicable in the short-run and that in the long-run, inflationary policies will not decrease unemployment.
Friedman then correctly predicted that, in the 1973–75 recession, both inflation and unemployment would increase. The long-run Phillips Curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment. Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of money supply measures such as the MZM ("money zero maturity") velocity, which is affected by unemployment in the short but not the long term.
Answer:
ReplyDeleteIn general, a Phillips curve shows a relationship between the inflation rate and the unemployment rate. There is a short-run Phillips curve and a long-run Phillips curve. Moving along a short-run Phillips curve, expected inflation and the natural unemployment rate are constant. The short-run Phillips curve shows the relationship between the inflation rate and unemployment rate: a higher inflation rate results in a lower unemployment rate. The long-run Phillips curve shows the relationship between the inflation rate and unemployment rate when the inflation rate equals the expected inflation rate. Moving along the long-run Phillips curve there is no tradeoff between the inflation rate and the unemployment rate: a higher inflation rate has no effect on unemployment rate, which remains equal to the natural unemployment rate.
What is the 'Phillips Curve'
ReplyDeleteThe Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. According to the Phillips curve, the lower an economy's rate of unemployment, the more rapidly wages paid to labor increase in that economy.
BREAKING DOWN 'Phillips Curve'
ReplyDeleteThe theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.
In economics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.
ReplyDeleteWhile there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.
In 1968, Milton Friedman asserted that the Phillips Curve was only applicable in the short-run and that in the long-run, inflationary policies will not decrease unemployment.
Friedman then correctly predicted that, in the 1973–75 recession, both inflation and unemployment would increase. The long-run Phillips Curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment. Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of money supply measures such as the MZM ("money zero maturity") velocity, which is affected by unemployment in the short but not the long term.