Economics Phillips Curve Questions Medium
The Phillips Curve is a graphical representation of the relationship between inflation and unemployment in an economy. It was first introduced by economist A.W. Phillips in 1958 and has since been a key concept in macroeconomics.
The short-run Phillips Curve depicts the inverse relationship between inflation and unemployment in the short term. According to this curve, when the economy is operating below its potential level of output, there is a trade-off between inflation and unemployment. In other words, as unemployment decreases, inflation tends to increase, and vice versa. This relationship is often referred to as the "Phillips trade-off" or the "Phillips effect."
The short-run Phillips Curve is typically downward sloping, indicating that there is a negative relationship between inflation and unemployment. This is because when there is high unemployment, there is less pressure on wages and prices, leading to lower inflation. Conversely, when unemployment is low, there is greater competition for workers, which can drive up wages and prices, resulting in higher inflation.
However, in the long run, the Phillips Curve becomes vertical, indicating that there is no trade-off between inflation and unemployment. This is known as the long-run Phillips Curve or the natural rate of unemployment. According to this concept, in the long run, the economy will tend to operate at its potential level of output, and any deviations from this level will only have temporary effects on inflation and unemployment.
The long-run Phillips Curve is vertical because it is based on the idea of the natural rate of unemployment, which is the rate of unemployment that exists when the economy is operating at its potential level of output. In the long run, wages and prices are flexible, and any changes in aggregate demand will only lead to temporary deviations from the natural rate of unemployment. As a result, the long-run Phillips Curve shows that there is no permanent trade-off between inflation and unemployment.
In summary, the short-run Phillips Curve illustrates the inverse relationship between inflation and unemployment in the short term, while the long-run Phillips Curve shows that there is no trade-off between inflation and unemployment in the long run.