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The Phillip's Curve

The Phillip's Curve - The Phillip’s Curve SPC 1 SPC 2 LPC...

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Unformatted text preview: The Phillip’s Curve SPC 1 SPC 2 LPC Unemployment Rate Inflation Rate 5% 3% 4% Natural Rate of Unemployment = Y FE Expected Rate of Inflation = 3% Expected Rate of Inflation = 5% A B C SPC 2 SPC 1 LPC Unemployment Rate Inflation Rate 5% 3% 4% B A C 1. 2. The Phillip’s Curve addresses the question of whether or not there is a trade-off between the unemployment rate and the inflation rate. Studies by the English economist A.W. Phillips and by the American economists Paul Samuelson and Robert Solow, found that there is a trade-off and that the higher the inflation rate the lower the unemployment rate. This result implies a downward sloping Phillip’s Curve. Presumably, when the economy nears capacity, inflation starts to accelerate and unemployment drops as business starts to run out of all resources including labor. Unfortunately, the Phillip’s Curve appeared to stop working in the 1970s as we encountered “Stagflation”. Stagflation happens when inflation and unemployment increase at the same time – that implies an upward sloping Phillip’s Curve. Economists needed to revisit the whole Phillip’s Curve idea. An explanation was offered by Milton Friedman and Edmund Phelps. Actually their explanation follows directly from the assumptions that the Classical School of economics makes about the way labor markets work. of economics makes about the way labor markets work....
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The Phillip's Curve - The Phillip’s Curve SPC 1 SPC 2 LPC...

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