Phillips Curve

The Phillips Curve is an economic concept that illustrates the inverse relationship between the rate of inflation and the rate of unemployment within an economy. The theory suggests that, in the short run, lower unemployment comes with higher inflation and vice versa.

For example, if a government implements policies that stimulate economic growth, unemployment may decrease as businesses hire more workers. However, as demand for goods and services increases, prices may rise, leading to higher inflation. Conversely, during a recession, higher unemployment may lead to lower inflation as consumer spending decreases.

Cases that illustrate the Phillips Curve include:

• 1970s Stagflation: During this period, many economies experienced high inflation and high unemployment simultaNeously, challenging the traditional Phillips Curve model.
• Post-2008 Financial Crisis: Some countries saw persistently high unemployment without corresponding high inflation, raising questions about the long-term applicability of the Phillips Curve.