Economics Phillips Curve Questions
The Phillips Curve relates to the concept of the wage-price spiral by illustrating the trade-off between inflation and unemployment. According to the Phillips Curve, there is an inverse relationship between the two variables, meaning that as unemployment decreases, inflation tends to increase, and vice versa. This relationship is often explained by the wage-price spiral, which suggests that when unemployment is low, workers have more bargaining power to demand higher wages. As wages increase, production costs rise, leading firms to increase prices to maintain their profit margins. This increase in prices then contributes to inflation. Conversely, when unemployment is high, workers have less bargaining power, leading to lower wage growth and lower inflation. Therefore, the Phillips Curve and the wage-price spiral provide insights into the dynamics between inflation, unemployment, and wage growth in an economy.