Principles of Macroeconomics: "16.2: Explaining Inflation – Unemployment Relationships"

Read this section about the Phillips curve, a short-run trade off between inflation and unemployment. The Phillips curve demonstrates that there is a trade-off between inflation and unemployment. According to the curve, when inflation is higher than expected, people will work at a lower real wage. Employers will in turn hire more workers at the lower real wage, increasing output and reducing unemployment. In the 1970s and 1980s, when both inflation and unemployment were continually rising – a phenomenon known as stagflation – many economists questioned the soundness of the Phillips curve. Attempt the "Try It" exercises at the end of the section.