What Is meant by the Phillips Curve and account for its breakdown in the 1970s.
The Phillips Curve shows a correlation seen between 1861 and 1950 showing the relationship between % inflation and the rate of unemployment. It shows a negative correlation hyperbola between the two sets of results (ie in general as unemployment rate decreases the % inflation increases).
Definition: Inflation is a persistant tendency for prices to rise.
This was seen to support Keynesian Economics, and was a politicians ‘dream’ scenario as it demonstrated that government intervention through fiscal policy could control inflation. For example through positive fiscal measures (ie reduction in taxes and increased government spending) then unemployment fell, but inflation increased. As the economy ‘heated up’, they could choke off the fiscal stimulis, and this would reduce inflation by increasing unemployment.
This relationship worked very well up until the 1970’s, when stagflation set in. Stagflation was a combination of both stagnation and high inflation and gave way to Monetarism.