PHILIPS CURVE

Economics data analysis question: The Phillips Curve

(a)(i) The Phillips curve is the line which shows that higher rates of unemployment are associated with lower rates of change of money wage rates and therefore inflation and vice versa. The main principle of a Phillips Curve is that it shows an inverse relationship between inflation and unemployment. An increase in inflation would by this theory result to a decrease in unemployment. This theory argues that you can’t have both unemployment and inflation increasing/decreasing at the same time.

(ii) Inflation is caused by an increase in aggregate demand. Inflation is a general rise in prices. When more is demanded prices rise. When demand increases output increases as well. To produce this higher level of output more workers are needed and thus unemployment decreases.
















This diagram illustrates how the relationship between inflation and unemployment works. The cause of inflation, ...