The Phillips Curve represents an economic concept that illustrates the inverse relationship between the rate of inflation and the rate of unemployment within an economy. Originally formulated by A.W. Phillips in 1958, the curve suggests that when unemployment is low, inflation tends to rise, and conversely, when unemployment is high, inflation tends to decrease. This relationship can be expressed mathematically as:
where:
However, the validity of the Phillips Curve has been debated, especially during periods of stagflation, where high inflation and high unemployment occurred simultaneously. Over time, economists have adjusted the model to include factors such as expectations and supply shocks, leading to the development of the New Keynesian Phillips Curve, which incorporates expectations about future inflation.
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