Economics Phillips Curve Questions
The Phillips Curve is a concept that illustrates the relationship between inflation and unemployment in an economy. It suggests that there is an inverse relationship between the two variables.
In the context of aggregate demand and aggregate supply, the Phillips Curve shows that when aggregate demand exceeds aggregate supply, there is upward pressure on prices, leading to inflation. This occurs when the economy is operating above its potential output level, resulting in low unemployment rates.
Conversely, when aggregate demand falls below aggregate supply, there is downward pressure on prices, leading to deflation. This occurs when the economy is operating below its potential output level, resulting in high unemployment rates.
The Phillips Curve implies that policymakers face a trade-off between inflation and unemployment. They can use expansionary monetary or fiscal policies to stimulate aggregate demand and reduce unemployment, but this may lead to higher inflation. On the other hand, contractionary policies can reduce inflation but may result in higher unemployment.