Question

. If workers automatically adjusted their wage demands to keep their real wages constant, would the Phillips curve relationship still hold?

Answer 1

Philips curve shows the inverse relationship between inflation and unemployment. If inflation increases, producers demand more workers to produce more good at higher price since wages are unchanged in the short run. But when workers automatically adjust wage rate to keep real wage constant. That is when price level rises nominal wage rises too and unemployment remains unchanged as increase in price is balanced by increase in cost of production. Thus even when inflation increases unemployment remains the same.

Therefore we can conclude that Philips curve relationship does not hold.