Economics Phillips Curve Questions Medium
The Phillips Curve is a concept in economics that describes the relationship between inflation and unemployment. In the context of New Keynesian economics, the Phillips Curve suggests that there is a trade-off between inflation and unemployment in the short run.
According to New Keynesian economics, the economy experiences short-run fluctuations due to nominal rigidities, such as sticky wages and prices. These rigidities prevent wages and prices from adjusting immediately to changes in economic conditions. As a result, changes in aggregate demand can lead to fluctuations in output and employment in the short run.
The Phillips Curve in the context of New Keynesian economics suggests that when the economy is operating below its potential level of output, there is a high level of unemployment. In this situation, firms have excess capacity and are willing to hire more workers at existing wage rates. As a result, the unemployment rate decreases, but there is little upward pressure on wages and prices.
Conversely, when the economy is operating above its potential level of output, there is a low level of unemployment. Firms are operating at or near full capacity, and there is limited room to hire additional workers. As a result, the unemployment rate decreases further, and there is upward pressure on wages and prices.
The Phillips Curve suggests that there is an inverse relationship between inflation and unemployment in the short run. When unemployment is high, inflation tends to be low, and vice versa. This relationship is often depicted as a downward-sloping curve, with higher levels of inflation associated with lower levels of unemployment.
However, in the long run, the Phillips Curve is believed to be vertical or nearly vertical. This is because in the long run, wages and prices are more flexible, and the economy tends to return to its potential level of output. In the long run, changes in aggregate demand primarily affect the price level rather than employment.
In summary, the Phillips Curve in the context of New Keynesian economics describes the short-run trade-off between inflation and unemployment. It suggests that when the economy is operating below its potential, there is a high level of unemployment and low inflation, while when the economy is operating above its potential, there is a low level of unemployment and high inflation. However, in the long run, the Phillips Curve becomes vertical as wages and prices adjust to changes in economic conditions.