The Phillips Curve.

For short.

1. Inflation rises: Unemployment drops.

2. Inflation falls: Unemployment rises.

3. Short-term tradeoff: Not long-term.

4. Expectations matter: Inflation adjusts behavior.

5. Policy impact: Central banks intervene.

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Extended.

1. Inflation and unemployment tradeoff: The Phillips Curve suggests an inverse relationship between inflation and unemployment, meaning lower unemployment typically leads to higher inflation, while higher unemployment tends to lower inflation.

2. Short-run applicability: In the short run, policymakers may exploit the tradeoff by stimulating demand, reducing unemployment, and accepting higher inflation, but this effect weakens over time due to inflation expectations.

3. Long-run limitations: In the long run, expectations adjust, and the tradeoff disappears. The economy moves toward the natural rate of unemployment, where inflation stabilizes regardless of unemployment levels, limiting policy effectiveness.

4. Role of expectations: If people anticipate future inflation, wages and prices adjust, making inflation self-fulfilling. This leads to stagflation—a period of high inflation and unemployment, breaking the short-term tradeoff.

5. Policy implications: Central banks focus on controlling inflation rather than reducing unemployment through monetary policy. They use interest rates and money supply adjustments to manage inflation expectations and economic stability.