Answer to Question #315744 in Macroeconomics for Vibhu

Question

What is Phillip curve ? Can Policy makers exploit the Phillip curve relationship by Trading more inflation for less unemployment in the short run, in the long run ?

Answer 1

Phillip curve is an economic theory which states that unemployment and inflation have a stable and inverse relationship.

changes in aggregate demand curve causes movement along Phillip's curve. In long run, unemployment and inflation are not related. during high inflation, informed workers will renegotiate their nominal wage to match the rate of inflation which will increase the cost of production on the side of supplier which will trigger to reduce output hence reduce profits therefore suppliers will employ few employees. an attempt to cause decrease the rate of unemployment in the short run at the cost of high inflation led to higher inflation and there was no change in unemployment in the long run.

in short term, as unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.