Answer to Question #209058 in Macroeconomics for jean marie

Question

Illustrate the usefulness of Phillips Curve in Macroeconomic management

Answer 1

Philip curve shows the inverse relationship between inflation and unemployment. As unemployment decreases, inflation increases. It claims that with economic growth comes inflation, which leads to more jobs and less unemployment. The concept behind Philip curve states the change in unemployment within an economy has a predictable effect on price inflation. Philip curve is a fundamental element of almost every macroeconomic forecasting model, used by government and businesses. It outlays the inverse proportions between unemployment rates and the level of inflation. In current trends, the output gap often replaces the unemployment rate as the measure of aggregate demand relative to aggregate supply. Increased growth, all other things equal, will reduce inflation, thus its most usefulness is relating unemployment (of capital as well as labor) to inflation in mainstream macroeconomic analysis and management.