Evaluate whether the Phillips curve can still validly resolve today’s issues of unemployment and inflation and...

Evaluate whether the Phillips curve can still validly resolve today’s issues of unemployment and inflation and forecast unemployment and inflation. Why or why not?

Expert Solution

We can forecast on whats the inflation and unemployment in both the short-run and long run.

The short-run Philips curve shows the inverse relationship between the level of unemployment and the rate of inflation. There is a trade-off between the unemployment rate and inflation in the short run. There is an increase in inflation when there is a decrease in unemployment in the short because when the unemployment decreases the income of people increases and the purchasing power of people increase and the consumption increases and this will cause the aggregate demand to increases and hence this will give rise to demand-pull inflation.

However, in the long run, the higher unemployment will lead to higher inflation. Long run Philips curve shows while there may be a trade-off between unemployment and inflation in the short run =, there's no trade-off in the long run. The long-run Philips curve is represented by a straight vertical at the natural rate of employment. Since there is a higher inflation worker demand for higher wages so firm's cost of production increases and so they cut back on the employment and hence higher unemployment in the long run. It is not possible to reduce the natural rate of unemployment by increasing the aggregate demand in the long run as this will just result in higher inflation and thus more unemployment.

Rahul Sunny answered 9 months ago

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