Recent research has suggested that the Phillips Curve has flattened substantially. Provide one reason why this...

Recent research has suggested that the Phillips Curve has flattened substantially. Provide one reason why this might have happened, and explain the implications for business cycle fluctuations

Expert Solution

Phillips curves tell us the relationship between inflation and unemployment.As per his view inflation is higher when unemployment is lower and when inflation is lower then unemployment is higher.He gives explantation behind this logaic that when there are lncrement of unfilled job then employer will give higher salary and incentive to those who are working and this will boost inflation.

Phillips curve has flattened because estimation of natural rate of unemployment is always uncertain.and we can not estimate it clearly.and for this reason inflation become less responsive to the unemployment rate.when prices become more flexible then output become volatile and its does not correlated more with output.so in result inflation is also reacted less with output devations.

Implication For business cycle fluctation -

Phillips curves have important policy implications.it suggest which monetary and fiscal policies will be used to control business cycle like inflation ,deflation without high level of unemployment.hence this observation is important to track right policy.

Rahul Sunny answered 2 years ago

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