Phillips Curve and Inflation
The relationship between inflation and unemployment according to the Phillips curve is a fixed inverse relationship. According to the theory, economic growth is also accompanied by inflation, which helps create more job opportunities, leading to less unemployment.[١] The unemployment rate is the x-axis of the Phillips curve, while the inflation rate is the y-axis.[٢]
The Phillips curve is based mainly on population inflation rates. For example, if inflation rates in a certain area are low, unemployment rates will also be low, and therefore wages will be high. Conversely, if inflation rates are high, unemployment rates will also be high, and therefore wages will be low.[٣]
The Phillips Curve is a graphic representation that shows the relationship between the unemployment rate and the rate of change in money wages. This relationship is represented by a rapid increase in wages when unemployment rates are low. It is worth noting that the Phillips Curve got its name from the economist William Phillips.[٣]
The Phillips curve indicates that if unemployment rates are Low will make it Employers pay higher wages to attract skilled employees, while if unemployment rates are high, employers will lower wages as there are more employees in the workplace.[٣]
Phillips Curve in Short and Long Run
The Phillips curve depicts the relationship between inflation and unemployment in the long run with a vertical line reflecting Non-existence A relationship that brings them together, while this curve depicts in the short term an inverse relationship between unemployment and inflation, so that this relationship appears in the shape of the letter (L) on the curve, as unemployment rates increase, inflation decreases, and vice versa.[٢]
Since workers' and consumers' expectations of future inflation rates are adaptive depending on the current rates of inflation in the environment in which they live, it is found that the inverse relationship between Combined unemployment and inflation exist in the short run. only.[١]
Central banks can increase inflation to lower unemployment. In periods of stagflation, workers and consumers will expect higher inflation if they know that the monetary authority is planning a new expansionary monetary policy. This will lead to a departure from the Phillips curve, so that the new policy will have little short-term effect on reducing unemployment, so unemployment remains high and inflation becomes high.[١]
What is inflation?
Inflation is defined as the increase in the prices of goods and services of common daily use, which include food, clothing, and housing. Inflation reflects the decrease in the purchasing power of the country's currency. Inflation usually occurs for several reasons, including the following:[٤]
- High demand and low production or supply of multiple goods.
- Overtrading For money that loses its purchasing power.
- People have more money, so they spend more, which leads to an increase in demand for goods.
the reviewer
- ^ A for T “Phillips Curve”, investopedia, Retrieved 5/2/2022. Edited.
- ^ A for “The Relationship Between Inflation and Unemployment”, courses.lumenlearning, Retrieved 5/2/2022. Edited.
- ^ A for T “Phillips curve”, britannica, Retrieved 5/2/2022. Edited.
- ↑ “What is Inflation?”, financialexpress, Retrieved 5/2/2022. Edited.
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