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In [[economics]], the '''Phillips curve''' is a graphical representation of the idea that "wages tend to rise faster when [[unemployment]] is low." <ref>[http://www.britannica.com/EBchecked/topic/456596/Phillips-curve Encyclopedia Britannica]</ref> However, "Both [[Friedman]] and Phelps argued that the government could not permanently trade higher inflation for lower unemployment." [ibid]  

In [[economics]], the '''Phillips curve''' is a graphical representation of the idea that there exists an inverse relationship between [[inflation]] and [[unemployment]]. In a standard Phillips curve diagram, the inflation rate or price level is plotted on the vertical axis, and the rate of unemployment on the horizontal.  

[[File:NAIRU.png|right|280px]]

In the 1970's and 1980's, [[monetarists]] such as [[Milton Friedman]] argued that the Phillips curve was an example of the inability of [[Keynesian economics]] and demand-management policies to account for or address the phenomenon of supply-side (cost-push) inflation or "[[stagflation]]." In other words, supply-siders were of the belief that the model could not adequately describe [[inflation]] that resulted from sources other than excess demand in the economy, such as [[exogenous]] supply shocks (sudden disruptions to supply).

 

The key problem, however, was primarily that the Phillips curve lacked a distinction between the [[short run]] and [[long run]] timeframes. As the accompanying diagram shows, changes in the structure of the economy (such as those caused by [[exogenous]] supply shocks) shift the short-run Phillips curve either up or down, such that any given level of [[unemployment]] corresponds to a higher or lower [[price level]]. According to this view, the inverse relationship between [[inflation]] and [[unemployment]] still holds, though the precise values of each that correspond to one another at any given short-run [[equilibrium]] may vary when supply side effects are at work.  

 

The long-run Phillips curve is drawn as a vertical line at the [[NAIRU]] (the Non-Accelerating Inflation Rate of Unemployment), and exemplifies the idea (adopted primarily by [[neoclassical]] economists) that in the [[long run]], the [[natural rate of unemployment]] will remain constant at the [[NAIRU]], though the corresponding rate of [[inflation]] may change over time. 

 

[[Category:Economics]]

[[Category:Economics]]