Question

What is the Phillips curve? Explain why Friedman and Phelps thought that the Phillips curve was vertical in the long run. Be sure that your answer comments on the role of expectations in their analysis and what has happened in the inflation and unemployment data since the 1970s.

Answer 1

Answer: The Phillips curve is a model that stated a stable negative relationship between inflation and unemployment.

Step-by-step explanation:

Up to the late 1960s, it was used to predict inflation and unemployment rates.

Milton Friedman and Edmund Phelps affirmed that this model could only apply in the short run, while in the long run, inflation expectations would make people anticipate a higher level of inflation, leading the economy to the natural level of unemployment for a higher level of inflation.

Furthermore, from the 1970s and onward, inflation and unemployment rates deviated from the predictions, as the relationship between those variables became unstable.