Phillips Curve Flashcards

The Phillips Curve illustrates the short-run relationship between which two macroeconomic variables?

Answer: Inflation and unemployment

The Phillips Curve shows the inverse relationship between the inflation rate and the unemployment rate in the short run.

Along the short-run Phillips Curve (SRPC), when unemployment decreases, inflation tends to:

Answer: Increase

The SRPC shows an inverse relationship — lower unemployment corresponds to higher inflation as demand for labor drives up wages and prices.

What does the Non-Accelerating Inflation Rate of Unemployment (NAIRU) represent on a Phillips Curve diagram?

Answer: The unemployment rate consistent with stable inflation

NAIRU is the unemployment rate at which inflation neither accelerates nor decelerates, representing the long-run equilibrium unemployment rate.

If the economy is operating below the NAIRU, which of the following is most likely to occur over time?

Answer: Accelerating inflation

Below the NAIRU, the labor market is overly tight, creating sustained upward wage pressure that causes inflation to accelerate over time.

The concept of 'stagflation' in the 1970s challenged the simple Phillips Curve because it demonstrated that:

Answer: High inflation and high unemployment can occur simultaneously

Stagflation — simultaneous high inflation and high unemployment — contradicted the original Phillips Curve's inverse relationship between the two variables.

Which economists are primarily credited with developing the expectations-augmented Phillips Curve in the late 1960s?

Answer: Milton Friedman and Edmund Phelps

Milton Friedman and Edmund Phelps independently argued that inflation expectations shift the short-run Phillips Curve, making the long-run curve vertical.

A.W. Phillips originally developed the Phillips Curve relationship using wage and unemployment data from which country?

Answer: United Kingdom

A.W. Phillips developed the curve in 1958 using nearly 100 years of UK wage inflation and unemployment data.