Phillips Curve

The Phillips Curve can be used to illustrate a macroeconomic policy trade off, namely attempts to reduce unemployment will lead to an increase in inflation and a failure to achieve price stability.

Phillip’s work has been heavily criticized because the stable relationship between unemployment and inflation has broken down. The 1970’s was a period noted for stagflation – high unemployment and inflation. In 2016, the UK’s unemployment rate currently sits at about 5%, while the inflation rate hovers close to 0%. Both periods contradict Phillips’ original findings.

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