phillips curve
[phillips curve|phillips curve] [phillips curve] describes the inverse relationship between inflation and unemployment in the short run.
Causes
phillips curve The Phillips curve's shape depends on the aggregate supply curve's characteristics. A vertical long-run aggregate supply curve results in a vertical Phillips curve, indicating no long-run tradeoff between inflation and unemployment. In contrast, a short-run upward-sloping aggregate supply curve leads to a downward-sloping Phillips curve, reflecting a temporary tradeoff between the two variables.
Effects
phillips curve [phillips curve] describes the inverse relationship between inflation and unemployment in the short run. In the long run, however, the [phillips curve] becomes vertical, indicating no trade-off between these two variables. This vertical shape arises because the long-run aggregate supply curve is vertical, leading to three different equilibria at three different price levels. The neoclassical view suggests that the long-run [phillips curve] is a vertical line starting from 5% unemployment, regardless of inflation rates. The [phillips curve] thus reflects the impact of aggregate demand shifts on inflation and unemployment in both short and long run contexts.
Comparison
phillips curve [phillips curve] contrasts with neoclassical long-run aggregate supply curve in that the latter implies a vertical shape for the Phillips curve, indicating no long run tradeoff between inflation and unemployment. This vertical AS curve, as shown in [link] (a), allows three different levels of aggregate demand to result in three different equilibria at three different price levels. The contrast highlights how the Phillips curve's shape reflects differing economic theories about aggregate supply and demand dynamics.
Constraints
phillips curve operates within a short-term relationship that may shift after a few years. The downward-sloping nature of phillips curve is subject to change over time. Constraints include the potential for the curve to alter its trajectory within a limited timeframe.
Aggregate Supply Causes
phillips curve The neoclassical long-run aggregate supply curve results in a vertical Phillips curve, showing no long-run tradeoff between inflation and unemployment. A vertical aggregate supply curve leads to three different equilibria at varying price levels when combined with three different aggregate demand levels. Short-run upward sloping aggregate supply implies a downward sloping Phillips curve, indicating a temporary tradeoff between inflation and unemployment.
Downward-sloping Curve
phillips curve is a downward-sloping curve that represents a short-term relationship between inflation and unemployment. The curve may shift after a few years, indicating changes in the economic relationship. This shift reflects the dynamic nature of the downward-sloping curve over time.