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Philips Curve Doubt

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I have a doubt in the philips curve. If the inflation rate is to remain the same while the unemployment rate increases, what is this situation called because on the philips curve it shifts to the right.

Please answer quick. What is that situation exactly called or does it not have a name

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Hi Kunal,

First of all, you have to understand that the Phillips curve (PC) is a model. Therefore, as represented by this model, in the short-run, there is indeed a negative relationship between inflation and unemployment in many cases (but by no means in all cases).

Second, it also matters what exactly that inflation rate is. For example, at high inflation rates, if that inflation rate stays constant but unemployment increases, then yes, there is an outward shift of the short-run PC. This actually shows that there is not necessarily a relationship between inflation and unemployment. Or, if the inflation rate is very low (especially if it's deflation), the PC is rather horizontal, meaning that the inflation rate does not change too much, yet unemployment can grow substantially.

The situation that you described is simply called: increasing unemployment.

I hope I was clear and this helps, but let me know if you have any questions.

Cheers,

EconDaddy
IB Economics teacher and tutor
www.econdaddy.com

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Thank you.

How can I represent increasing unemployment graphically. Should I just draw a Philips curve or is there another way I can represent it

 

Regards,

Kunal Geed

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Increasing unemployment can be shown by a simple AS/AD graph. Depending on the situation, you can shift AS or AD and thereby show the increased unemployment. Personally, I'd use that since its easier to explain than the Philipps Curve in my opinion.

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Increasing unemployment can be shown by a simple AS/AD graph. Depending on the situation, you can shift AS or AD and thereby show the increased unemployment. Personally, I'd use that since its easier to explain than the Philipps Curve in my opinion.

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In my IA I am having a situation where there is high inflation rate while unemployment is increasing. The government has set the interest rate at 14.25% to combat the inflation. Now I how can I find a solution to both the situations in the Article, because if I were to increase aggregate demand then the inflation would rise but if I were to let it be the same unemployment would remain a problem.

Regards,

Kunal Geed

 

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