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The Phillips Curve represents relationship between :
- a)Deflation and Unemployment
- b)Inflation and Unemployment
- c)Inflation and Disguised Unemployment
- d)Deflation and Cyclical Unemployment
Correct answer is option 'B'. Can you explain this answer?
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Verified Answer
The Phillips Curve represents relationship between :a) Deflation and U...
Inflation and Unemployment
Explanation: The Phillips curve is a single-equation empirical model, describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy.
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The Phillips Curve represents relationship between :a) Deflation and U...
Understanding the Phillips Curve
The Phillips Curve is a fundamental concept in economics that illustrates the inverse relationship between inflation and unemployment.
Key Aspects of the Phillips Curve:
- Inverse Relationship: The core idea is that when inflation rises, unemployment tends to decrease, and vice versa. This suggests that with higher prices, businesses likely expand and hire more employees, reducing unemployment.
- Short-Run vs. Long-Run: In the short run, the Phillips Curve can depict a trade-off between inflation and unemployment. However, in the long run, the relationship may weaken as expectations of inflation adjust. Economists argue that in the long run, the economy tends towards the natural rate of unemployment, where inflation does not exert significant influence.
Historical Context
- Origin: The concept was introduced by economist A.W. Phillips in 1958, based on empirical data from the UK, showing the relationship between wage inflation and unemployment.
- Policy Implications: Policymakers have often used the Phillips Curve to guide decisions. For instance, they may aim for lower unemployment rates through expansionary monetary policy, accepting higher inflation as a trade-off.
Criticism and Evolution
- Expectations Augmented Phillips Curve: Economists like Milton Friedman and Edmund Phelps criticized the original model, arguing that it failed to account for inflation expectations. They proposed that the Phillips Curve is only valid in the short term.
- Current Relevance: The relationship depicted by the Phillips Curve continues to be a topic of debate, especially during periods of stagflation, where high inflation and high unemployment occur simultaneously.
In summary, the Phillips Curve encapsulates the important relationship between inflation and unemployment, serving as a valuable tool for understanding economic dynamics and guiding policy.
The Phillips Curve is a fundamental concept in economics that illustrates the inverse relationship between inflation and unemployment.
Key Aspects of the Phillips Curve:
- Inverse Relationship: The core idea is that when inflation rises, unemployment tends to decrease, and vice versa. This suggests that with higher prices, businesses likely expand and hire more employees, reducing unemployment.
- Short-Run vs. Long-Run: In the short run, the Phillips Curve can depict a trade-off between inflation and unemployment. However, in the long run, the relationship may weaken as expectations of inflation adjust. Economists argue that in the long run, the economy tends towards the natural rate of unemployment, where inflation does not exert significant influence.
Historical Context
- Origin: The concept was introduced by economist A.W. Phillips in 1958, based on empirical data from the UK, showing the relationship between wage inflation and unemployment.
- Policy Implications: Policymakers have often used the Phillips Curve to guide decisions. For instance, they may aim for lower unemployment rates through expansionary monetary policy, accepting higher inflation as a trade-off.
Criticism and Evolution
- Expectations Augmented Phillips Curve: Economists like Milton Friedman and Edmund Phelps criticized the original model, arguing that it failed to account for inflation expectations. They proposed that the Phillips Curve is only valid in the short term.
- Current Relevance: The relationship depicted by the Phillips Curve continues to be a topic of debate, especially during periods of stagflation, where high inflation and high unemployment occur simultaneously.
In summary, the Phillips Curve encapsulates the important relationship between inflation and unemployment, serving as a valuable tool for understanding economic dynamics and guiding policy.
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The Phillips Curve represents relationship between :a) Deflation and Unemploymentb) Inflation and Unemploymentc) Inflation and Disguised Unemploymentd) Deflation and Cyclical UnemploymentCorrect answer is option 'B'. Can you explain this answer?
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