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Does stagflation contradict the theory of the Phillips curve?
Solution
Stagflation is the situation in an economy which experiences high inflation accompanied by high
unemployment. Philips curve explains the trade off between inflation and unemployment.
According to Philips curve, if the inflation rate in the economy increased, then the
unemployment would fall, thereby, having an inverse relationship. However, stagflation
contradicts the theory as it leads to an impossible Philips curve.

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Does stagflation contradict the theory of the Phillips curveSol.pdf

  • 1. Does stagflation contradict the theory of the Phillips curve? Solution Stagflation is the situation in an economy which experiences high inflation accompanied by high unemployment. Philips curve explains the trade off between inflation and unemployment. According to Philips curve, if the inflation rate in the economy increased, then the unemployment would fall, thereby, having an inverse relationship. However, stagflation contradicts the theory as it leads to an impossible Philips curve.