Question

Evaluate whether the Phillips curve can still validly resolve today’s issue of unemployment and inflation and forecast unemployment and inflation. Why or why not?

Answer 1

Ans) Phillips curve solve the relation between unemployment rate and inflation. According to this there is inverse relation between unemployment rate and inflation. Suppose the demand of the goods have been increased in the economy, by this the demand of labour will increase to supply the quantity demanded at that time. Increase in employment will further increase the price of the commodity, or the scarce factor will influence the price to rise so that demand get reduced. As we show that inflation has risen with the increase in employment rate or decrease in unemployment rate so there is inverse relation between both. It gives static analysis. Yes Phillips curve can still validly resolve today's issue it shows only short run relation. According to some economists there is no relationship between both in long run. The Phillips curve is vertical line in long run according to prof. Friedman. We can use Phillips curve for forecasting the policies to be implemented for achieving the growth rate. Or it can tell how much inflation should be risen for lowering the unemployment rate. It can be use by government to cure deflation if it occurring in economy, (by raising govt expenditure the demand of the product will rise, income will also rise so the employment). The use of Phillips curve is only for short period.