In reality Phillips himself while discussing the partnership between inflation and unemployment, sensed the partnership between rates regarding rise in salary speed (since a beneficial proxy toward rates out of rising cost of living) for the one-hand and you can jobless speed on the other

During step one970s a mysterious event are saw in the us and you will Great britain whenever indeed there resided a high rate out of infla­tion side by side with a high jobless price.

It multiple lifetime regarding each other high rate off inflation and large unemployment price (otherwise low-level away from genuine federal tool) from inside the 70s and you may early 80s might have been known as stagflation.

Why don’t we earliest give an explanation to the Phillips bend. Each other Keynesians and Monetarists agreed to the current presence of the Phillips contour. twenty five.3.

The explanation out of Phillips bend by Keynesian economists is fairly easy and try graphically depicted in Fig

It may be detailed one Keynesian economists assume the brand new up-slanting aggregate supply bend. Indeed, Keynes himself accepted that bend As is up slanting inside the advanced variety, which is, because benefit ways close complete a career peak, new aggregate supply bend hills up.

According to Keynesian econo­mists, aggregate supply curve is upward sloping for two reasons. First, as output is increased by the firms in the economy, diminishing returns to variable factors, especially to labour, accrue resulting in fall in marginal physical product (MPP_L) of labour. With money wage rate (W) as given and ‘ fixed, the fall in the marginal physical product of labour causes the rise in the marginal cost (MC) of production (Note that MC= W/MPP_L). With the fall in the MPP of labour, wage rate remaining constant, the term W/MPP_L measuring marginal cost (MC) will rise. Read more