Question

Is the Phillips curve a good model to use in predicting the relationship between inflation and unemployment? Please, make sure to answer in details supporting your answer with diagram

Thanks in advance

Answer 1

Philips curve describes the relationship between the inflation and unemployment. The relationship is L shaped. In 1950s philips curve showed that there is a trade off so policymakers need to use fiscal and monetary policy. Suppose if unemployment is high and inflation is low then policymakes should increase aggregate demand to reduce unemployment. If AD curve shifts to the right from AD1 to AD2 then real GDP increases from Y1 to Y2. So firms employ more workers and unemployment falls. But at some point of time whrn there is almost full capacity, then workers demand higher wages so there is a chance of increasing inflation.