2. The history of Phillip's curve has three major periods. Discuss these phases and the theorists as

Thereafter phillips model observed an inverse

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employment which assumes there exists a unique equilibrium level of unemployment. Thereafter, Phillips model observed an inverse relationship between inflation data and unemployment. As inflation increased, unemployment decreased and vice versa. While this model held pre-1975 there were a few fundamental issues to follow. Post-1975 a new shock in oil prices caused stagflation whereby there was both high inflation and high unemployment. Furthermore, due to the neutrality of money, the Phillips Curve was vertical in the long run. This gave rise to the second phase, the Expectations-Augmented Phillips Curve or the short-run Phillips curve. Here, Phelps and Friedman challenged the theory and argued that rational employers and workers would only pay attention to real wages. Therefore, in their view, real wages would adjust to make the demand of labour equal to the supply and the unemployment rate would simply be the equilibrium associated with the given real wage rate. Furthermore, both Friedman and Phelps argued that government could not permanently trade higher inflation for lower unemployment. In this model if the government used expansionary policy; the increased demand causes firms to raise their prices and demand more labour. For a short time, money wage rates increase so workers can supply more labour, this is known as money illusion. Thus, the unemployment rate falls but they do not
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