The Phillips Curve is a theory that explains the relationship between inflation and unemployment. It suggests that when inflation is high, unemployment tends to be low, and vice versa. However, using this idea in real life can be tricky. Here’s why:
Historical Problems: There have been times, like during stagflation in the 1970s, when both high inflation and high unemployment happened together. This doesn't fit with what the Phillips Curve expects, which makes us question how reliable the curve really is.
Expectations Matter: The Phillips Curve doesn’t fully take into account how people adjust their plans based on what they think will happen with inflation. If people believe that prices will keep rising, they might change their spending habits. This can mess up the expected relationship between inflation and unemployment.
Short-Term vs. Long-Term: The Phillips Curve might show a relationship that works in the short term, but over a longer period, it becomes less reliable. This means trying to lower unemployment by increasing inflation might not work in the long run.
To tackle these challenges, people who make economic policies can look at how expectations about future inflation influence the economy. They might also consider using a different model called the AD-AS model for a better understanding of the overall economic effects.
The Phillips Curve is a theory that explains the relationship between inflation and unemployment. It suggests that when inflation is high, unemployment tends to be low, and vice versa. However, using this idea in real life can be tricky. Here’s why:
Historical Problems: There have been times, like during stagflation in the 1970s, when both high inflation and high unemployment happened together. This doesn't fit with what the Phillips Curve expects, which makes us question how reliable the curve really is.
Expectations Matter: The Phillips Curve doesn’t fully take into account how people adjust their plans based on what they think will happen with inflation. If people believe that prices will keep rising, they might change their spending habits. This can mess up the expected relationship between inflation and unemployment.
Short-Term vs. Long-Term: The Phillips Curve might show a relationship that works in the short term, but over a longer period, it becomes less reliable. This means trying to lower unemployment by increasing inflation might not work in the long run.
To tackle these challenges, people who make economic policies can look at how expectations about future inflation influence the economy. They might also consider using a different model called the AD-AS model for a better understanding of the overall economic effects.