Answer to Question #151765 in Macroeconomics for Hirak jyoti boro

Question

Explain philips curve and its policy implications .

Answer 1

During the period of stagnation, inflation as well the rate of unemployment increases at the same time because Philip's curve shifts upward and in the right direction.

The Philips curve in the normal scenario (N1) and in stagnation (N2).

In a normal scenario, the Phillips curve shows an increased relationship between the unemployment rate and the inflation rate. During stagnation, the company typically faces a supply-side shock which leads to a fall in productivity.

The equilibrium point moves from (1) to (2). Due to this shifting of the aggregate supply curve, the prices of goods increase, but at the same time demand decreases. Due to decreased demand production is also decreased, which affects the unemployment rate directly, which increases drastically.