The Phillips Curve is an economic concept that represents the relationship between inflation and unemployment in an economy. It posits that there is an inverse relationship between the two: when unemployment is low, inflation tends to be high, and when unemployment is high, inflation tends to be low.
The original formulation of the Phillips Curve, introduced by economist A.W. Phillips in 1958, was based on empirical observation of the economy in the United Kingdom, where he noted that lower unemployment rates were associated with higher wage inflation. This idea was later generalized to suggest a trade-off between inflation and unemployment.
The Phillips Curve can be depicted graphically, where the x-axis represents unemployment rates and the y-axis shows the rate of inflation. The curve typically slopes downward to the right, indicating that as unemployment decreases, inflation increases.
Over time, economists have further developed the idea into the "expectations-augmented Phillips Curve," which incorporates the role of inflation expectations in shaping the trade-off between inflation and unemployment. This version suggests that the trade-off may not hold in the long run. If people expect higher inflation, they may adjust their behavior, leading to a situation where higher inflation does not result in lower unemployment as it might in the short run.
Overall, the Phillips Curve is used by policymakers to guide monetary policy decisions, although the relationship has been debated and may vary depending on economic conditions and structural factors.
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