What relationship does Phillips curve show us?

Bill Phillips was an economist from New Zealand who spotted that when employment levels are high, wages rise faster, therefore people start spending more money, therefore, boosting aggregate demand. This evantually leads to to an increase in price levels - higher inflation. In the case of high unemployement, people have less money to spend, so price levels go down, respectively. 

Therefore, according to Phillips curve there is an inverse relationship between infaltion and unemployment. This trade-off can be also demonstrated on AD & AS diagram. In the period of economic growth, an increase in AD leads to higher Real GDP, we can assume that firms start to employ more workers and unemployment falls. However, as the economy gets closer to its full capacity we can expect an increase in infaltionary pressures. As with low unemployment workers will start demanding higher wages - wage inflation. Firms will start charging higher prices.

SP
Answered by Simeon P. Economics tutor

2339 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain the term 'equilibrium' and demonstrate how a new equilibrium position is established when there is a decrease in demand for a good or service.


Evaluate the view that a reduction in UK unemployment is best achieved through the use of supply-side policies.


What effects aggregate demand and how would it effect the price level of the economy?


What would be the effect on the UK Economy of an increase in the Bank of England Base Rate?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning