Question

1) What in the world is the "Phillips Curve"?? How would you describe it to your sibling, parent, grandparent, 5th grade classroom?

2) What's so funky about the "Phillips Curve" in Australia? What does the article point as the main issue with the model?

3) Who is Philip Lowe and what did he say about the "Phillips Curve"?

Answer 1

Answer 1:

The Phillips curve shows negative relationship between inflation rate and unemployment rate in the economy. To a parent it can be explained in the layman language in the following manner : As the overall demand in the economy falls, there is surplus of the goods left with the sellers, thus they agree to sell their good even at low prices to clear out their stock in the wake of low demand. Thus, price level in the economy will fall due to this low level of demand in the economy. Also, as demand falls, the producers will reduce the amount of the labor hired because production has declined in the economy. As the labor hired falls there will be fall in the wage rate in the economy. This is because unemployment has risen in the economy and thus workers will be willing to work even at low wages. Thus, unemployment rate increases with is fall in aggregate demand. Thus, fall in aggregate demand leads to low inflation and rise in unemployment rate. Thus, negative relationship occurs between price level and unemployment rate. Since this concept was developed by economist A.W Phillips, it is knows as Phillips Curve,