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8.) What is the Phillips Curve? Why is it downward sloping in the short-run if wages...

8.) What is the Phillips Curve? Why is it downward sloping in the short-run if wages are stickier

than the prices of other goods and services? Why is it vertical in the long-run?

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Answer #1

Phillips Curve relates the rate of unemployment withe rate of inflation prevailing in the economy.

It slopes down in the short run because prices are flexible. Hence when there is a demand side recession in the economy the rate of unemployment is higher and the rate of inflation is lower. Similarly, when there is a demand side expansion in the economy the rate of unemployment is lower and the rate of inflation is higher. Wages adjust slowly then prices so that labor market experiences unemployment. This shapes the short run Phillips Curve a downward sloping line.

In the long run wages adjust swiftly so any change in price brings changes in wages so labor market maintains full employment. This implies that long run unemployment rate is fixed at its natural rate, thereby shaping the long run  Phillips Curve a vertical line.

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