Economics Phillips Curve Questions
The Phillips Curve is an economic concept that suggests a trade-off between inflation and unemployment. According to the Phillips Curve, there is an inverse relationship between the two variables. When unemployment is low, inflation tends to be high, and vice versa. This relationship is based on the idea that as the economy approaches full employment, the demand for labor increases, leading to higher wages. Higher wages then result in increased production costs for firms, which are passed on to consumers in the form of higher prices, causing inflation. Conversely, when unemployment is high, there is less pressure on wages, leading to lower production costs and lower inflation. Therefore, the Phillips Curve implies that policymakers face a trade-off between inflation and unemployment and must make decisions based on their desired balance between the two variables.