Consider the following three figures, which show the Phillips curve relationship
ID: 1102512 • Letter: C
Question
Consider the following three figures, which show the Phillips curve relationship or he 1970s, 1980s and 1990s. e out ut gap s on the r and the changen unflation so hekxis pain what each of these Phillips curves tells us about each of the three decades. In which period would fighting inflation be the most difficult? Hint: For 1960-2015, the slope of the Phillips Curve is 1/3. But note below that the slopes are different at.41, .65,.26, respectively. 1970s 1980s An-026 Gap 990s 0.65 Gap 0.41 Gap 4.0 8.0 6.04 4.0 2 2.0 0.0 4.0 30 4.0 1.0 2.0 3.0 -60-40 20 0.0 2.0 4.0 6.0Explanation / Answer
Slope of Philips curve talks about pace of price adjustment; or stickiness of prices and wages in the economy.
Flatter Philips curve imply that large change in output or unemployment will have little impact on the price level.
During 1970s, Philips curve was flattest, showing how 1% change in unemployment or output led to 0.41% change in price only, implying sticky wages.
During 1980s, Philips curve was steep, showing how 1% change in unemployment or output led to 0.65% change in price only, implying very less sticky wages.
During 1990s, Philips curve was flat, showing how 1% change in unemployment or output led to 0.26% change in price only, implying almost sticky wages.