Question

What can cause a of the Phillips Curve in the short run?

Answer 1

In the short-run Phillips curve shows an inverse relationship between unemployment and inflation. As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.

Explanation:

Given a stationary aggregate supply curve, increases in aggregate demand create increases in real output. As output increases, unemployment decreases. With more people employed in the workforce, spending within the economy increases, and demand-pull inflation occurs, raising price levels.

So the short-run Phillips curve illustrates a real, inverse correlation between inflation and unemployment, but this relationship can only exist in the short run. The idea of a stable trade-off between inflation and unemployment in the long run has been disproved by economic history.