The Phillips phase of the inflation-unemployment cycle emerges because

Question

Quizplus · Accepted Answer

The Phillips phase of the inflation-unemployment cycle emerges due to unanticipated increases in the price level produced by increases in aggregate demand. As aggregate demand increases, there is pressure on prices to rise, leading to inflation. However, initially, there is an increase in production and employment, which reduces unemployment. This is known as the Phillips phase. Prices and wages may or may not be flexible, depending on the degree of price and wage stickiness in the economy. However, it is the unanticipated increase in the price level that leads to the Phillips phase, and not the flexibility of prices and wages. Nominal wages and prices falling is inconsistent with the Phillips phase, where there is an initial increase in production and employment. People being reluctant to spend despite expansionary policies may lead to a lack of demand and lower economic activity, which is not consistent with the Phillips phase.

The Phillips Phase of the Inflation-Unemployment Cycle Emerges Because