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Why does the Phillips curve relation break down at high unemployment rates?
Why does the Phillips curve relation break down at high unemployment rates?
Expert Solution
The Phillips for states and inverse relationship between the inflation and the unemployment. Aggregate demand could be stimulated if there is high levels of unemployment and the inflation level remains low.this would lead to fall in the unemployment level but may result in increased rate of inflation. There was a breakdown in the Phillips curve in 1970. Where stagflation was experienced. There was high unemployment as well as inflation was also high. Moneytarist arguments included that with the increase in the money supply there arised a spiral of wage inflation which was of no help to decrease the unemployment.they advocated that by fall in the supply of money and gaining a low inflation level and employment levels were just temporarily affected.others had different arguments that the trade of existed in Phillips curve which made it shift towards right leading to a cost of inflation. In the mid 1970 it seemed that there was absence of stable patterns. The stable relationship which existed between the unemployment and the inflation perceived to be broken.this was due to the multiple number of rates of inflation at a fixed rate of unemployment.
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