Economics Phillips Curve Questions
The Phillips Curve relates to the concept of inflation expectations by suggesting that there is a trade-off between inflation and unemployment in the short run. According to the Phillips Curve, when unemployment is low, inflation tends to be high, and vice versa. Inflation expectations play a crucial role in this relationship as they influence the behavior of workers and firms. If individuals expect higher inflation in the future, they may demand higher wages to compensate for the anticipated increase in prices. This can lead to a higher rate of inflation as firms pass on the increased labor costs to consumers through higher prices. Conversely, if individuals expect lower inflation, they may be willing to accept lower wage increases, which can help keep inflation in check. Therefore, the Phillips Curve suggests that inflation expectations can impact the actual rate of inflation in an economy.