What are the assumptions of the Phillips Curve?

The assumptions of the Phillips Curve are as follows:

1. Stable expectations: The Phillips Curve assumes that individuals and firms have stable and consistent expectations about inflation. This means that they anticipate future inflation accurately and adjust their behavior accordingly.

2. Closed economy: The Phillips Curve assumes a closed economy, where there is no international trade or capital flows. This assumption allows for a direct relationship between unemployment and inflation within the domestic economy.

3. Constant wage markup: The Phillips Curve assumes a constant wage markup, which means that firms have a fixed profit margin and adjust wages accordingly. This assumption implies that changes in inflation are solely driven by changes in labor market conditions.

4. Short-run focus: The Phillips Curve focuses on the short-run relationship between unemployment and inflation. It assumes that in the short run, there is a trade-off between these two variables, meaning that reducing unemployment will lead to higher inflation, and vice versa.

5. Aggregate demand stability: The Phillips Curve assumes that aggregate demand is stable and does not fluctuate significantly in the short run. This assumption implies that changes in inflation are primarily driven by changes in the supply side of the economy, such as labor market conditions.

It is important to note that these assumptions may not hold true in all situations and economies, and the Phillips Curve has been subject to criticism and modifications over time.