What does the Phillips curve show?

The Phillips curve shows the trade-off that must be made between inflation and unemployment . There is an inverse relationship between the two variables, with lower unemployment rates corresponding to higher inflation, and vice versa. This can be explained by the fact that as unemployment is reduced, the economy moves closer to full capacity. With fewer spare workers, wages get pushed up (supply of labour shifts inwards, increasing price of labour). Higher wages translate to a higher cost of production for firms, and therefore, higher prices for consumers (i.e. inflation). Additionally, low unemployment rates create a sense of confidence among consumers, triggering greater consumption. This can lead to a positive multiplier effect and subsequently demand-pull inflation.
The Phillips curve represents the trade-off that governments must make when pursuing their various macro-economic objectives. They must compromise and decide the relative importance of each objective.

ZN
Answered by Zara N. Economics tutor

3225 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What are the characteristics of perfect competition?


How can the government use Demand side policies to boost economic growth


What are the trade-offs with other macroeconomic policy objectives of a fall in the unemployment rate?


How would you go about calculating inflation using CPI (consumer price index)


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