Inflation, Unemployment & Phillips Curve
The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting that as unemployment falls, inflation tends to rise, and vice versa. Policymakers often use this concept to balance economic growth and price stability. However, the relationship is not always consistent, as factors like expectations and supply shocks can disrupt the pattern, leading to periods where high inflation and high unemployment occur simultaneously, a phenomenon known as stagflation.
Inflation, Unemployment & Phillips Curve
The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting that as unemployment falls, inflation tends to rise, and vice versa. Policymakers often use this concept to balance economic growth and price stability. However, the relationship is not always consistent, as factors like expectations and supply shocks can disrupt the pattern, leading to periods where high inflation and high unemployment occur simultaneously, a phenomenon known as stagflation.
💡 Key Takeaways
- Explain the short-run inflation–unemployment trade-off shown by the Phillips Curve.
- Distinguish between the short-run and long-run Phillips Curve and why the long-run curve is vertical.
- Describe how expectations and credibility influence the position and slope of the Phillips Curve.
- Discuss policy implications and the potential costs of using inflation to fight unemployment.
❓ Frequently Asked Questions
What is the Phillips Curve?
A short-run relationship suggesting an inverse trade-off between unemployment and inflation: when unemployment falls, inflation tends to rise, and vice versa, all else equal.
How do the short-run and long-run interpretations differ?
Short run: there is a trade-off between unemployment and inflation. Long run: the trade-off disappears as expectations adjust and unemployment moves toward its natural rate.
What factors can shift the Phillips Curve?
Expectations of inflation, supply shocks (like energy prices), and structural changes in the labor market can shift the curve or alter the trade-off.
What is NAIRU and why does it matter?
NAIRU is the non-accelerating inflation rate of unemployment—the unemployment rate that does not accelerate inflation. If unemployment is below NAIRU, inflation tends to rise; if above, inflation tends to slow.