The document discusses the Phillips Curve, which originally showed a short-run tradeoff between inflation and unemployment according to data analyzed by Prof. Phillips. Lower unemployment was believed to cause higher inflation as more employment and spending increased aggregate demand. However, in the 1970s both inflation and unemployment remained high, a phenomenon known as stagflation, requiring economists to rethink the Phillips Curve relationship in the long run.

1. Aquinas College Economics Department
The Phillips Curve
The Inflation – Unemployment
Trade off

2. Aquinas College Economics Department
Background
Prof Phillips showed using data that
illustrated a short run trade off between
inflation and unemployment
Falling unemployment will cause inflation
to rise
As more people get jobs the more the earn,
the more they spend which increased AD
which is then inflationary

3. Aquinas College Economics Department
The Curve
Unemployment
Inflation

4. Aquinas College Economics Department
However!
During the 1970s inflation and
unemployment remained high together
This is known as stagflation
The Philips curve theory now needed to be
redrawn
Economists accepted that Short Run Philips
Curve exists but a LR curve should be
drawn vertically