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The Phillips Curve

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The Phillips Curve
The Phillips Curve
The Phillips curve is an attempt to describe the macroeconomic tradeoff between unemployment and inflation. In the late 1950's, economists such as A.W. Phillips started noticing that, historically, stretches of low unemployment were correlated with periods of high inflation, and vice versa. This finding suggested that there was a stable inverse relationship between the unemployment rate and the level of inflation, as shown in the example above.

The logic behind the Phillips curve is based on the traditional macroeconomic model of aggregate demand and aggregate supply. Since it is often the case that inflation is the result of increased aggregate demand for goods and services, it makes sense that higher levels of inflation would be linked to higher levels of output and therefore lower unemployment.

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