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Econ: What is The Phillips Curve? 1 Views


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What is The Phillips Curve? The Phillips Curve was an economic theory that held that unemployment and inflation were inverse correlations. This was considered conventional wisdom until debunked during the 1970s Carter Administration years, where Stagflation became added to the financial lexicon - a condition where unemployment and inflation rose in tandem.

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00:00

And finance Allah shmoop What is the Phillips curve No

00:07

not the filler up curve or fill up curve which

00:10

tracks relationship between cholesterol levels and eating high volumes of

00:13

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

00:16

that describes an inverse relationship between unemployment levels and the

00:20

amount of inflation in an economy Right And you think

00:24

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

00:26

means economy is really hot And so employment levels are

00:29

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

00:33

has or shows It means the two forces move in

00:36

opposite direction like as the amount you talk about economics

00:39

goes up the number of dates you get goes down

00:42

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

00:45

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

00:47

tracks the percentage of the population who are looking for

00:50

work but cannot find a job Ah high unemployment rate

00:54

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

00:56

a sign that the economy is weak Bread lines hoovervilles

01:00

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

01:02

know all kinds of disasters Meanwhile a low unemployment rate

01:06

means that nearly everyone who wants a job has one

01:09

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

01:11

well then you have inflation Usually inflation remember is a

01:15

measure that shows the rate at which prices are rising

01:18

across an economy High inflation prices rising quickly Things get

01:22

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

01:26

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

01:29

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

01:33

looking to buy for ten bucks on the other side

01:35

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

01:39

at all A little bit of time Relatively stable currency

01:43

relative to everything else Easy for people to buy stuff

01:46

And businesses can make long term spending plans without worrying

01:50

a lot about their currency being valued last in the

01:53

future and all that stuff So under the Phillips curve

01:55

theory unemployment and inflation have an inverse relationship When unemployment

02:00

is high inflation will be low Meanwhile when inflation is

02:04

high unemployment will be low writes a teeter totter Well

02:08

the Phillips curve is named after an economist named William

02:10

Phillips He first published his theory in the nineteen fifties

02:13

well fun facts about William Phillips He was born in

02:16

New Zealand and his real first name was Alban Okay

02:20

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

02:22

this There was a high level of aggregate demand in

02:25

an economy meaning that people have cash and are looking

02:27

to buy stuff all the pork rinds and superhero bobbleheads

02:30

and you know whatever To get everybody all the stuff

02:32

they want to buy Companies have to hire more people

02:34

Teo make this stuff Unemployment rates fall is Mohr People

02:38

get hired And meanwhile the additional demand drives prices higher

02:42

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

02:45

unemployment low Phillips curve in action All right now the

02:49

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

02:51

to buy stuff People have to ration their intake of

02:53

pork rinds and cut back on their purchase of superhero

02:56

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

02:59

They even lay people off Unemployment then gets high Meanwhile

03:03

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

03:06

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

03:09

the Phillips curve informs a lot of economic decision making

03:12

It gets a lot of use in the real world

03:13

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

03:15

Here in the U S The main organization in charge

03:18

of keeping the economy humming is the Federal Reserve It

03:21

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

03:25

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

03:28

the economy The Fed has two stated goals Keep inflation

03:31

under control and keep unemployment as low as possible Well

03:35

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

03:37

to have it both ways Inflation low unemployment low under

03:41

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

03:43

at once So in practice the Fed is constantly adjusting

03:46

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

03:48

keep the perfect water temperature in the shower When the

03:51

economy is sluggish and unemployment is high the Fed will

03:54

launch some inflationary policies like good While turning up the

03:57

hot water They lower interest rates and put more money

04:00

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

04:02

easier for companies to invest right lower interest rates of

04:05

capital Cheaper unemployment then goes down But inflation starts to

04:08

rise well Once inflation gets a little too strong the

04:11

Fed will crank up some cold water higher interest rates

04:14

borrowing and investing then get more expensive less money moving

04:17

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

04:21

that unemployment then starts to rise But the Fed is

04:24

constantly going back and forth Keep a reason will bounce

04:26

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

04:29

the fact that the bed policies take a little time

04:31

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

04:34

when Fed sets policy and then he actually see the

04:36

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

04:39

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

04:42

and bam the economy is fixed right takes time So

04:45

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

04:47

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

04:50

evidence that it works under most conditions in the short

04:53

term But in the long run many economists feel the

04:55

Phillips curve starts to fall apart In this anti Phillips

04:58

conception Well the rate of inflation is decided by monetary

05:02

issues The amount of cash floating around in an economy

05:05

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

05:09

is the result of economy wide levels of supply and

05:12

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

05:15

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

05:18

bummer If you happen to run the Fed it means

05:20

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

05:24

playbook Well the U S learned this lesson the hard

05:26

way in the nineteen seventies the time of leisure suits

05:28

and you know getting into drunken fights with Keith Richards

05:31

at Studio fifty four and the time of something known

05:34

as stagflation Well during this time the U S Economy

05:38

experienced stagnant growth like barely any complete with relatively high

05:42

unemployment mean while at the same time the country saw

05:45

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

05:50

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

05:53

up interest rates The move got rid of the inflation

05:56

but it also contributed to basically a recession Once inflation

06:00

slowed the economy was able to resume growth again And

06:02

we got the boom years of the Reagan nineteen eighties

06:05

aerobics outfits and boom boxes Yeah and Keith Richards probably

06:09

still getting in drunken fights except maybe now they happened

06:12

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

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