Which of the following statement(s) is/are true with respect to Phillips Curve ?
1. It shows the trade-off between unemployment and inflation
2. The downward sloping curve of Phillips Curve is generally held to be valid only in the short run
3. In the long run, Phillips Curve is usually thought to be horizontal at the non-accelerating inflation rate of unemployment (NAIRU)
[CDS I 2016]
Select the correct answer using the code given below:
– (a) 1 only
– (b) 2 and 3 only
– (c) 1 and 2 only
– (d) 1, 2 and 3
Phillips curve :
– (c) 1 and 2 only
Phillips curve :
Philips curve states that inflation and unemployment have a stable and inverse relationship. It is named after William Philip.
It claims that economic growth comes inflation, which in turn should lead to more jobs and less unemployment. But this is said to be true only in the short run.
• In the long run, rising inflation will not decrease unemployment. The long-run Phillips curve is seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.
• The non-accelerating inflation rate of unemployment (NAIRU) is the specific unemployment rate at which the rate of inflation stabilizes and inflation will neither increase nor decrease.