Phillips Curve

Topics: Inflation, Monetary policy, Milton Friedman Pages: 4 (1144 words) Published: July 14, 2013
Short-Run Phillips Curve
Possible Reasons for the “breakdown” of the Phillips Curve

Word Count: 1012 Words

In this Essay we will talk about what the Phillips curve is and the ups and downs it faced. Phillips Curve was once very trustable and followed by many countries until the 1970’s breakdown which led economists to believe that this theory was not true. We will talk about the reasons for the breakdown of the Phillips curve in 1970’s and how it was overcome. We will also learn about the Oil crisis that occurred which was one of the main reasons of the breakdown in 1970’s. The meaning of stagflation and the barber boom will be explained and the theory of Milton Friedman will be highlighted. So without further Delay, Let’s begin. {Hoover K (2013)} “The Phillips curve represents the relationship between the rate of Inflation and the Unemployment rate.” This means that change in unemployment will have a predictable change in inflation . We can also say that, the higher the inflation, lower is the unemployment. This curve is named after William Phillip who published his research which looked at the relationship between the rate of change of wages and the rate of unemployment in United Kingdom between the period 1861-1957. Works based on the Phillips curve received Seven Nobel Prizes in 1970.

Figure [ 1 ] : The Phillips Curve .
In Fig 1. We can see that there is inverse relation between inflation and unemployment. Where the inflation is 8%, the unemployment is 2%, whereas, when the unemployment is 8% inflation is 2%. Many countries tried to control unemployment by increasing or decreasing inflation using this curve in 1960’s and 1970’s

The Fall of the Phillips curve, nowadays also known as ‘Stagflation’ happened between 1971 and 1984. Many Economists started doubting the Phillips Curve and suggested that it was just a way to fool people and not really had any relation between unemployment and inflation. For example, in 1978, the...
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