Phillips curve

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In economics, the Phillips curve is a graphical representation of the idea that there exists an inverse relationship between inflation and unemployment. In a standard Phillips curve diagram, the inflation rate or price level is plotted on the vertical axis, and the rate of unemployment on the horizontal.

NAIRU.png

While monetarists such as Milton Friedman argued in the 1970's and 1980's that the Phillips curve was an example of the inability of Keynesian economics and demand-management policies to account for or address the phenomenon of supply-side (cost-push) inflation or "stagflation", it was merely a sense of the distinction between the short run and long run timeframes that the model lacked. As the accompanying diagram shows, changes in the structure of the economy (such as those caused by exogenous supply shocks) shift the short-run Phillips curve either up or down, such that any given level of unemployment corresponds to a higher or lower price level. The long-run Phillips curve is drawn as a vertical line at the NAIRU, and exemplifies the idea (adopted primarily by neoclassical economists) that in the long run, the natural rate of unemployment will remain constant at the NAIRU, though the corresponding rate of inflation may change over time.