The Phillips Curve illustrates the inverse relationship between inflation and unemployment within an economy. According to this concept, when unemployment is low, inflation tends to be high, and vice versa. This relationship can be explained by the idea that lower unemployment leads to increased demand for goods and services, which can drive prices up. Conversely, higher unemployment generally results in lower consumer spending, leading to reduced inflationary pressures.
Mathematically, this relationship can be depicted as:
where:
However, the relationship has been subject to criticism, especially during periods of stagflation, where high inflation and high unemployment occur simultaneously, suggesting that the Phillips Curve may not hold in all economic conditions.
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