Phillips Curve

The Phillips Curve is an economic theory which states that inflation and unemployment have an inverse relationship. As unemployment decreases, inflation increases, and vice versa.

For example, during an economic boom, the demand for goods and services is higher, which puts upward pressure on prices, thus leading to an increase in inflation. Conversely, during a recession, the lack of demand means fewer people are employed, and wages are lower, leading to deflation.

The Phillips curve is often used by economists and policymakers to make decisions about monetary policy. For example, if an economy is experiencing high inflation, the central bank may choose to raise interest rates to reduce spending and cool down the economy. This can lead to higher unemployment in the short term, but may help bring inflation back down over the long term.