Phillips Curve

Question 1

What is the Phillips Curve

Answer 1

The Phillips curve indicates that there is a negative relationship between inflation and unemployment.

Question 2

Is Inflation procyclical or countercyclical

Answer 2

Procyclical

Question 3

Is Unemployment procyclical or countercyclical

Answer 3

Countercyclical

Question 4

What is the reasoning behind the phillips curve

Answer 4

The logic behind this negative relationship is that as eocnomic acitivyt increases, the unemployment rate will fall. Excess demand in the labor market will lead to icnreasin wages as employees compete for workers. Higher wages increase production costs and this normally passed onto consumers as higher prices, thus leading to a rise in the rate of inflation.

Question 5

What does a movement along the phillips curve mean

Answer 5

A movement down along the Phillips curve would indicate that economcy is slowing with rising unemployment and falling inflation

Question 6

Why is phillips curve important for policy makers

Answer 6

It suggests a tradeoff between inflation and unemployment. If policy makers want to reduce unemployment to low levels because they believe the costs of unemployment are too high, then they risk the negative costs of high inflation. If policy makers beleive that high inflation has more significant costs, then the can reduce the level of economic activity. but the tradeoff will be that unemployment will incrase.