Phillips curve

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An inverse relationship between inflation and unemployment. The original Phillips curve depicted the rate of increase of nominal wages against unemployment. The model has been extended to take account of inflationary expectations: inflation is considered low or high relative to expected inflation, whereas unemployment is considered low or high relative to the natural rate of unemployment, at which inflation equals expected inflation. The short-run expectations-augmented Phillips curve plots actual inflation against unemployment, with given inflation expectations. In the long run it is assumed that rational expectations lead the expected inflation rate to equal the actual rate, so that the long-run Phillips curve is very steep or even vertical at the non-accelerating inflation rate of unemployment (NAIRU).

Phillips Curve

Subjects: Economics.

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