Phillips Curve A Relationship Between The Inflation Rate...

Name: Instructor: Course: Date: Phillips curve The Phillips curve history and overview The Phillips curve represents a relationship between the inflation rate and the unemployment rate. The Phillips curve is named after its first exponent A.H.W. Phillips who was a classical economist who first came up with this relationship. He posited that the lower the employment rate firms are forced to source for funds so as to increase wages and be able to attract labour. This in turns leads to a rise in money wage inflation. The first challenge to this theory was by Milton Friedman and Edward Phelps who in individual analysis showed that the Phillips curve could not hold in the long run. Friedman asserted that rational employers pay inflation adjusted wages and this ensures that there is a natural rate of unemployment which is self adjusting in the long run. Therefore the state cannot be able as a matter of policy to regulate inflation by pushing unemployment below the natural rate as it will readjust itself to this rate. In the long run th e inverse relationship between unemployment and inflation as posited by Phillips could not hold. His assertion was validated in the 1970’s when there was an increase of inflation from around 2.5% to 7% and the unemployment rate also increased from around 4% to 6%. He therefore contributed to the Phillips theory by creating a distinction between the short run relationship and the long run relationship. The original Phillips curve above TheShow MoreRelatedPhillips Curve Essay1198 Words   |  5 PagesPrinciples of Economics: The Phillips curve shows the relationship between unemployment and inflation in an economy. Unemployment involves people who are registered as able, available and willing to work at the going wage rate but who cannot find work despite actively searching for work. 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This curve can be used as a tool to represent the positive relationship between inflation and unemployment in the short-run. In order to comprehend the positive relationship between inflation and unemployment first, we must know what inflation is, how we define unemployment, and how we can use the Phillip Curve to make a functional comparison