The Phillips curve shows a tradeoff between inflation and unemployment from "summary" of Principles of Macroeconomics by N. Gregory Mankiw
The Phillips curve illustrates the relationship between inflation and unemployment in an economy. It suggests that there is a tradeoff between these two variables - as one goes up, the other tends to go down. The curve is based on the observation that when unemployment is low, inflation tends to be high, and vice versa. This relationship was first identified by economist A. W. Phillips in the 1950s. According to the Phillips curve, when unemployment is high, workers have less bargaining power, leading to downward pressure on wages and prices. This results in low inflation. Conversely, when unemployment is low, workers have more bargaining power, leading to upward pressure on wages and prices. This results in high inflation. Therefore, policymakers face a dilemma - they must choose between low inflation and high unemployment, or high inflation and low unemployment. However, it is important to note that the tradeoff depicted by the Phillips curve is not permanent. In the short run, policymakers can use expansionary monetary or fiscal policies to reduce unemployment, but this may lead to higher inflation. Conversely, contractionary policies can reduce inflation but at the cost of higher unemployment. In the long run, the Phillips curve may shift due to changes in expectations, productivity, or other factors.- The Phillips curve serves as a useful tool for policymakers to understand the relationship between inflation and unemployment and make informed decisions about monetary and fiscal policy. It highlights the importance of considering both variables when formulating economic policies to achieve stable and sustainable growth.
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