Phillips Curve
The Phillips curve shows the relationship between inflation and unemployment. The original inverse relationship (lower unemployment, higher inflation) reflects tight labour markets driving wage growth. The expectations-augmented Phillips curve adds inflation expectations as a factor.
Real World
The 1970s UK stagflation — where inflation hit 25% in 1975 while unemployment doubled — shattered belief in a stable Phillips curve trade-off and led policymakers to adopt monetarist approaches under Thatcher.
Exam Focus
Distinguish the short-run Phillips curve (movement along) from the long-run vertical curve (shift due to expectations) for full marks.
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