The Phillips Curve and Macroeconomic Policy Conflicts:
The Phillips Curve: an empirical relationship suggesting that there is a trade off between
unemployment and inflation.
Short Run Phillips Curve:
● In times of very low
unemployment, wages rise very
quickly as workers are scarce and
so have more bargaining power to
push up wages. In times of high
unemployment, it makes sense
that wage growth would fall and
even become negative if workers
take pay cuts. Changes in wage
growth feed through to changes in
the inflation rate.
● This is a problem for policymakers as it means that if politicians want low
unemployment, they will suffer from high inflation and if they want to maintain low
inflation then they must sacrifice some employment.
● This theory stems from classical model assumptions - shows how in the short run, in
order to decrease unemployment below its natural rate, the economy will suffer from
higher inflation and vice versa.
● Shifts in AD correlate to movements along the short run phillips curve.
● Phillips curve can go below x axis
Stagflation:
● Monetarists like Milton Friedman argued that this
model did not explain periods where the economy could be
suffering from periods of high unemployment and high
inflation - known as stagflation.
● A negative supply side shock would cause an
increase in inflation and an increase in unemployment - the
short run phillips curve would shift outwards. The short run
phillips curve shifts to the opposite direction that SRAS shifts
● A positive supply side shock would cause a fall in inflation and unemployment, SRPC
would shift inwards.
The Phillips Curve: an empirical relationship suggesting that there is a trade off between
unemployment and inflation.
Short Run Phillips Curve:
● In times of very low
unemployment, wages rise very
quickly as workers are scarce and
so have more bargaining power to
push up wages. In times of high
unemployment, it makes sense
that wage growth would fall and
even become negative if workers
take pay cuts. Changes in wage
growth feed through to changes in
the inflation rate.
● This is a problem for policymakers as it means that if politicians want low
unemployment, they will suffer from high inflation and if they want to maintain low
inflation then they must sacrifice some employment.
● This theory stems from classical model assumptions - shows how in the short run, in
order to decrease unemployment below its natural rate, the economy will suffer from
higher inflation and vice versa.
● Shifts in AD correlate to movements along the short run phillips curve.
● Phillips curve can go below x axis
Stagflation:
● Monetarists like Milton Friedman argued that this
model did not explain periods where the economy could be
suffering from periods of high unemployment and high
inflation - known as stagflation.
● A negative supply side shock would cause an
increase in inflation and an increase in unemployment - the
short run phillips curve would shift outwards. The short run
phillips curve shifts to the opposite direction that SRAS shifts
● A positive supply side shock would cause a fall in inflation and unemployment, SRPC
would shift inwards.
