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

Thus the unemployment rate falls but they do not

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labour, this is known as money illusion. Thus, the unemployment rate falls but they do not realize that there purchasing power has fallen too. However, over time workers anticipate higher rates of inflation and supply less labour instead so that increases in wages keep up with inflation. Over time, the unemployment rate returns to its natural rate and real wages are restored to their old level. The last phase is the New-Keynesian Phillips Curve. Keynesians argue that there is no natural rate of unemployment to which the actual rate tends to return to. The New Keynesian Phillips Curve is a popular modern version of the Phillips curve that is consistent with rational expectations. In this model, sticky prices are used therefore there is a positive relationship between the rate of inflation and level of demand and negative relationship between the rate of inflation and unemployment. Like the expectations augmented Phillips
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curve, the New-Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily but not forever. While none of the three models can fit inflation and unemployment data over time, most economists agree that in its original form the Phillips curve is too simplistic. However, modified versions of the Phillips curve that take inflation into account remain influential.
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