Difference between revisions of "Phillips curve"

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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.  
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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]
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[[File:NAIRU.png|right|280px]]
 
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While [[monetarists]] such as [[Milton Friedman]] argued in the 1970's and 1980's 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]]", it was merely a sense of the distinction between the short run and long run timeframes that the model lacked. 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. The long-run Phillips curve is drawn as a vertical line at the [[NAIRU]], 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.
 
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[[Category:Economics]]
 
[[Category:Economics]]

Revision as of 15:26, June 18, 2009

In economics, the Phillips curve is a graphical representation of the idea that "wages tend to rise faster when unemployment is low." [1] However, "Both Friedman and Phelps argued that the government could not permanently trade higher inflation for lower unemployment." [ibid]

  1. ↑ Encyclopedia Britannica
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