Question

Analyze why the recent 20-year U.S. unemployment and inflation data approves or disapproves the short-run Phillips curve?

Answer 1

The recent 20 years' data representing the rate of inflation and unemployment rate in the U.S disapproves of the short-run Phillips curve.

Explanation:

The Phillips curve defines an inverse relationship between unemployment and inflation in the economy. It explains that a tight labor market, that is, a low rate of unemployment usually puts upward pressure on the general price level in the economy. This relationship is represented by the Phillips curve which is usually plotted with the unemployment rate on the horizontal axis and inflation on the vertical axis. The inverse relation between inflation and employment implies the downward slope of the curve.

In the recent few years, economists have found that the relationship established by the Phillips curve between the unemployment rate and inflation has not been followed. It has been observed that at a low level of unemployment, the inflation rate has also stayed low, unlike the Phillips curve theory. During the recovery period from the Great Recession, the unemployment rate had fallen and the inflation also stayed low, even below the Fed's target. The recent 20 years' data representing the rate of inflation and unemployment rate in the U.S disapproves of the short-run Phillips curve because they do not typically represent an inverse relationship between them as established by the Phillips curve.