Phillips curve

Economics

(noun)

A graph that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Related Terms

Business

(noun)

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation. While it has been observed that there is a stable short run tradeoff between unemployment and inflation, this has not been observed in the long run

Related Terms

Examples of Phillips curve in the following topics:

  • The Relationship Between the Phillips Curve and AD-AD

    • Changes in aggregate demand cause movements along the Phillips curve, all other variables held constant.
    • The Phillips curve shows the inverse trade-off between rates of inflation and rates of unemployment.
    • The Phillips curve and aggregate demand share similar components.
    • These two factors are captured as equivalent movements along the Phillips curve from points A to D.
    • This illustrates an important point: changes in aggregate demand cause movements along the Phillips curve.

  • The Short-Run Phillips Curve

    • The short-run Phillips curve depicts the inverse trade-off between inflation and unemployment.
    • The Phillips curve depicts the relationship between inflation and unemployment rates.
    • However, the short-run Phillips curve is roughly L-shaped to reflect the initial inverse relationship between the two variables .
    • During the 1960's, the Phillips curve rose to prominence because it seemed to accurately depict real-world macroeconomics.
    • The short-run Phillips curve shows that in the short-term there is a tradeoff between inflation and unemployment.

  • The Phillips Curve

    • The Phillips curve relates the rate of inflation with the rate of unemployment.
    • The early idea for the Phillips curve was proposed in 1958 by economist A.W.
    • The theory of the Phillips curve seemed stable and predictable.
    • They do not form the classic L-shape the short-run Phillips curve would predict.
    • Review the historical evidence regarding the theory of the Phillips curve

  • Shifting the Phillips Curve with a Supply Shock

    • The Phillips curve shows the relationship between inflation and unemployment.
    • In the 1960's, economists believed that the short-run Phillips curve was stable.
    • By the 1970's, economic events dashed the idea of a predictable Phillips curve.
    • Consequently, the Phillips curve could not model this situation.
    • Give examples of aggregate supply shock that shift the Phillips curve

  • The Long-Run Phillips Curve

    • The Phillips curve shows the trade-off between inflation and unemployment, but how accurate is this relationship in the long run?
    • To get a better sense of the long-run Phillips curve, consider the example shown in .
    • This is shown as a movement along the short-run Phillips curve, to point B, which is an unstable equilibrium.
    • The reason the short-run Phillips curve shifts is due to the changes in inflation expectations.
    • Examine the NAIRU and its relationship to the long term Phillips curve

  • Disinflation

    • The Phillips curve can illustrate this last point more closely.
    • Consider an economy initially at point A on the long-run Phillips curve in .
    • The expected rate of inflation has also decreased due to different inflation expectations, resulting in a shift of the short-run Phillips curve.
    • Disinflation can be illustrated as movements along the short-run and long-run Phillips curves.

  • Relationship Between Expectations and Inflation

    • The short-run Phillips curve is said to shift because of workers' future inflation expectations.
    • To connect this to the Phillips curve, consider .
    • As an example of how this applies to the Phillips curve, consider again.

  • Employment Levels

    • The Phillips curve tells us that there is no single unemployment number that one can single out as the full employment rate.
    • Ideas associated with the Phillips curve questioned the possibility and value of full employment in a society: this theory suggests that full employment—especially as defined normatively—will be associated with positive inflation .
    • Short-run Phillips curve before and after Expansionary Policy, with long-run Phillips curve (NAIRU).

  • Alternative Views

    • Phillips Curve: Another important model following Keynes's publications is the Phillips Curve, put forward by William Phillips in 1958.

  • Curve Sketching

    • Curve sketching is used to produce a rough idea of overall shape of a curve given its equation without computing a detailed plot.
    • Determine the symmetry of the curve.
    • If the exponent of $x$ is always even in the equation of the curve, then the $y$-axis is an axis of symmetry for the curve.
    • Determine the asymptotes of the curve.
    • Also determine from which side the curve approaches the asymptotes and where the asymptotes intersect the curve.