Philips Curve

Question 1

Shows conflict between

Answer 1

Inflation/ wage growth vs unemploymetn

Question 2

Inverse relationship between wage growth and unemployment

Answer 2

• when unemployment is low, workers are scarce, hence they have more bargaining power to push wages
• when unemployment is high, workers are plentiful, so there is downward pressure on wages
• wage growth can be alternated with inflation

Question 3

High wage growth tends to lead to higher inflation due to demand pull pressures

Answer 3

• low unemployment leads to higher AD as well - higher demand pull pressure = sacrifice of inflation objective
• direct correlation with the classical supply demand curve, the impact on price level after an outward shift of AD and extension of SRAS, caused by the fall in unemployment

Question 4

Doesn’t account for times of stagflation

Answer 4

• picture a negative supply side which, PL would rise on the LRAS curve, but in theory on Philips curve, unemployment would fall too, which is inaccurate
• therefore, economists concluded that the SRPC curve would shift outwards to SRPC2, to uphold the theory.