How does the Phillips Curve relate to the concept of the output gap?

Economics Phillips Curve Questions



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How does the Phillips Curve relate to the concept of the output gap?

The Phillips Curve relates to the concept of the output gap by illustrating the inverse relationship between inflation and unemployment. The curve suggests that when the economy is operating below its potential output (output gap is negative), there is a high level of unemployment and low inflation. Conversely, when the economy is operating above its potential output (output gap is positive), there is low unemployment and high inflation. Therefore, the Phillips Curve helps to explain the relationship between the level of economic activity (output gap) and inflation.