Economics Phillips Curve Questions
The Phillips Curve is a concept in economics that shows the relationship between inflation and unemployment. It suggests that there is an inverse relationship between the two variables, meaning that when unemployment is low, inflation tends to be high, and vice versa.
The expectations-augmented Phillips Curve takes into account the role of inflation expectations in determining the relationship between inflation and unemployment. According to this concept, individuals and firms form expectations about future inflation based on their past experiences and other economic factors. These expectations then influence their behavior, such as wage and price setting decisions.
In the context of the expectations-augmented Phillips Curve, if individuals and firms expect higher inflation in the future, they will adjust their behavior accordingly. For example, workers may demand higher wages to compensate for expected inflation, and firms may increase prices to maintain their profit margins. This adjustment in behavior can lead to an increase in inflation even when unemployment is high.
Therefore, the expectations-augmented Phillips Curve recognizes that inflation expectations play a crucial role in determining the relationship between inflation and unemployment. It suggests that changes in inflation expectations can shift the Phillips Curve, making it flatter or steeper depending on the level of inflation expectations.