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    Tahinay, K.V.T. - Assignment #02

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    Tahinay, K.V.T. - Assignment #02

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    Tahinay Karl
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    Tahinay, K.V.T. - Assignment #02

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    Tahinay Karl

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    Tahinay, Karl Vincent T.

    ECO 4108 - 1 9/27/2021


    BSBA BE 4-1

    Assignment #2 – Model Development in Special Topics in Business Economics

    Statement: wages tend to rise faster when unemployment is low

    π = πe − h ( u – uN ),h > 0

    Where:
    π is inflation
    πe is expected inflation
    u is unemployment,
    h is a fixed positive coefficient
    u is the “natural rate of unemployment”

    Independent Variable: Unemployment Rate


    Dependent Variable: Inflation

    Alban William Housego Philips invented the Phillips curve, which states that
    inflation and unemployment have a stable and inverse relationship. According to the
    hypothesis, economic expansion leads to inflation, which leads to more jobs and lowers
    unemployment. However, the original concept has been somewhat disproven
    empirically due to the occurrence of stagflation in the 1970s, when there were high
    levels of both inflation and unemployment.

    The Phillips curve depicts the relationship between inflation and unemployment
    rates. The long-run Phillips curve is a vertical line that illustrates that there is no
    permanent trade-off between inflation and unemployment in the long run. However, the
    short-run Phillips curve is roughly L-shaped to reflect the initial inverse relationship
    between the two variables. As unemployment rates increase, inflation decreases; as
    unemployment rates decrease, inflation increases.

    The main implication of the Phillips curve is that, because a particular level of


    unemployment will influence a particular rate of wage increase, the two goals of low
    unemployment and a low rate of inflation may be incompatible.

    References:

    Anderson, Somer. The Investopedia. (2021, April 30). Philips Curve.


    https://www.investopedia.com/terms/p/phillipscurve.asp

    Britannica.com. Philips Curve. https://www.britannica.com/topic/Phillips-curve

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