Economics Phillips Curve Questions
The Phillips Curve explains stagflation by highlighting the inverse relationship between unemployment and inflation. According to the traditional Phillips Curve, as unemployment decreases, inflation increases, and vice versa. However, stagflation occurs when there is a simultaneous occurrence of high unemployment and high inflation, which contradicts the traditional Phillips Curve. This phenomenon can be explained by the presence of supply-side shocks, such as an increase in oil prices or a decrease in productivity, which lead to a decrease in aggregate supply. As a result, prices rise (inflation) while output and employment levels remain low (unemployment), causing stagflation.