ShmoopTube

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And finance Allah shmoop What is the Phillips curve No

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not the filler up curve or fill up curve which

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tracks relationship between cholesterol levels and eating high volumes of

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cheap fried chicken's the Phillips Curve It's an economic model

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that describes an inverse relationship between unemployment levels and the

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amount of inflation in an economy Right And you think

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about this Okay so if there's a lot of inflation

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means economy is really hot And so employment levels are

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probably very high Well inverse relationship That's what Philip's curve

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has or shows It means the two forces move in

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opposite direction like as the amount you talk about economics

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goes up the number of dates you get goes down

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Okay well let's apply that principle to the Phillips curve

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Here you have the unemployment rate They're a figure that

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tracks the percentage of the population who are looking for

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work but cannot find a job Ah high unemployment rate

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means a lot of people are out of jobs It's

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a sign that the economy is weak Bread lines hoovervilles

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thirty year old's moving back in with their parents You

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know all kinds of disasters Meanwhile a low unemployment rate

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means that nearly everyone who wants a job has one

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You know it's a good sign for an economy but

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well then you have inflation Usually inflation remember is a

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measure that shows the rate at which prices are rising

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across an economy High inflation prices rising quickly Things get

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more expensive It's tough on old people particularly old people

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Consumers Yeah each time prices go up people can't afford

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fewer pork rinds or superhero bobble heads or whatever they're

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looking to buy for ten bucks on the other side

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There's low inflation like when prices air rising slowly if

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at all A little bit of time Relatively stable currency

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relative to everything else Easy for people to buy stuff

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And businesses can make long term spending plans without worrying

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a lot about their currency being valued last in the

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future and all that stuff So under the Phillips curve

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theory unemployment and inflation have an inverse relationship When unemployment

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is high inflation will be low Meanwhile when inflation is

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high unemployment will be low writes a teeter totter Well

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the Phillips curve is named after an economist named William

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Phillips He first published his theory in the nineteen fifties

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well fun facts about William Phillips He was born in

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New Zealand and his real first name was Alban Okay

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moving on the mechanics behind the Philip's curve Work like

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this There was a high level of aggregate demand in

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an economy meaning that people have cash and are looking

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to buy stuff all the pork rinds and superhero bobbleheads

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and you know whatever To get everybody all the stuff

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they want to buy Companies have to hire more people

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Teo make this stuff Unemployment rates fall is Mohr People

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get hired And meanwhile the additional demand drives prices higher

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Rising prices Yeah that's the definition of inflation Inflation high

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unemployment low Phillips curve in action All right now the

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other side aggregate man is low People don't have money

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to buy stuff People have to ration their intake of

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pork rinds and cut back on their purchase of superhero

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bobbleheads Companies don't need as many workers they don't hire

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They even lay people off Unemployment then gets high Meanwhile

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without much demand there's no upward pressure on prices and

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inflation is low Yet Philip's curve in action again Well

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the Phillips curve informs a lot of economic decision making

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It gets a lot of use in the real world

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So let's just take the United States is an example

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Here in the U S The main organization in charge

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of keeping the economy humming is the Federal Reserve It

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sets what's called monetary policy basically deciding how much money

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there is and how fast it's allowed to move through

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the economy The Fed has two stated goals Keep inflation

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under control and keep unemployment as low as possible Well

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you'll notice the Phillips curve problem here The feds trying

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to have it both ways Inflation low unemployment low under

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the Phillips curve theory Well you can't really have both

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at once So in practice the Fed is constantly adjusting

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to stay in the sweet spot They're like trying to

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keep the perfect water temperature in the shower When the

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economy is sluggish and unemployment is high the Fed will

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launch some inflationary policies like good While turning up the

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hot water They lower interest rates and put more money

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into the system It's then easier to borrow money and

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easier for companies to invest right lower interest rates of

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capital Cheaper unemployment then goes down But inflation starts to

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rise well Once inflation gets a little too strong the

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Fed will crank up some cold water higher interest rates

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borrowing and investing then get more expensive less money moving

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around inflation then comes under control But there's a risk

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that unemployment then starts to rise But the Fed is

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constantly going back and forth Keep a reason will bounce

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on the film's curve Tradeoff This management is complicated by

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the fact that the bed policies take a little time

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to work their way through the system Right there's lag

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when Fed sets policy and then he actually see the

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numbers in actual data that's coming through the pipeline The

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Fed doesn't just wave a wand or push a button

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and bam the economy is fixed right takes time So

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there's a problem here It's not clear that Philip Curve

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works in the long term There's a fair amount of

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evidence that it works under most conditions in the short

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term But in the long run many economists feel the

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Phillips curve starts to fall apart In this anti Phillips

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conception Well the rate of inflation is decided by monetary

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issues The amount of cash floating around in an economy

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unemployment doesn't really play a role Meanwhile long term employment

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is the result of economy wide levels of supply and

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demand for human labor It means you can't just inflate

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your way out of every high unemployment situation It's a

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bummer If you happen to run the Fed it means

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situations can come up for which there's no clear Phillips

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playbook Well the U S learned this lesson the hard

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way in the nineteen seventies the time of leisure suits

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and you know getting into drunken fights with Keith Richards

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at Studio fifty four and the time of something known

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as stagflation Well during this time the U S Economy

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experienced stagnant growth like barely any complete with relatively high

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unemployment mean while at the same time the country saw

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high inflation rates high unemployment high inflation rial Philip's curve

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conundrum We'll eventually the feds solved the problem by jacking

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up interest rates The move got rid of the inflation

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but it also contributed to basically a recession Once inflation

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slowed the economy was able to resume growth again And

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we got the boom years of the Reagan nineteen eighties

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aerobics outfits and boom boxes Yeah and Keith Richards probably

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still getting in drunken fights except maybe now they happened

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at the mall or the nurse's office or something like 00:06:14.861 --> [endTime] that

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