Economics Phillips Curve Questions Medium
The Phillips Curve is a graphical representation of the relationship between inflation and unemployment. It is based on several assumptions:
1. Stable expectations: The Phillips Curve assumes that individuals and firms have stable expectations about future inflation. This means that they anticipate future price changes accurately and adjust their behavior accordingly.
2. Closed economy: The Phillips Curve assumes a closed economy, meaning that it does not take into account international trade or capital flows. It assumes that changes in inflation and unemployment are solely determined by domestic factors.
3. Short-run focus: The Phillips Curve focuses on the short-run relationship between inflation and unemployment. It assumes that in the short run, there is a trade-off between these two variables, meaning that a decrease in unemployment will lead to an increase in inflation, and vice versa.
4. Constant wage-price markup: The Phillips Curve assumes that there is a constant relationship between changes in wages and changes in prices. It assumes that firms have a fixed markup over their production costs, and any increase in wages will be passed on to consumers in the form of higher prices.
5. Aggregate demand-driven inflation: The Phillips Curve assumes that inflation is primarily driven by changes in aggregate demand. It suggests that when aggregate demand exceeds the economy's capacity to produce goods and services, inflation will increase.
It is important to note that these assumptions have been subject to criticism and empirical evidence has shown that the Phillips Curve relationship may not hold in the long run or in certain economic conditions.