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Phillips Curve July 14, 2010

Posted by petrarcanomics in Role of Government.
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The economist A.W. Phillips created the short-run Phillips curve to show what is often an inverse relationship that exists between the inflation rate on the vertical axis and the unemployment rate which is shown on the horizontal axis. When shifts of the aggregate demand curve take place the Phillips curve model holds true. An AD shift to the right causes inflation to increase and the unemployment rate to drop as output increases. An AD shift to the left causes the inflation rate to decrease and the unemployment rate to increase as output decreases.

When the short-run aggregate supply curve shifts, it will shift the entire Phillips curve. For example, if SRAS shifts to the right, inflation will decrease and the unemployment rate will decrease as output increases, shifting the entire Phillips curve inward toward the origin. If the SRAS curve shifts to the left, inflation will increase and the unemployment rate will increase simultaneously, causing the Phillips curve to shift outward away from the origin. The best example of this is the stagflationary period at the end of the 1970s and early 1980s. The cause of this stagflation was the large increase in the vital input resource of oil.

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