Essay About Low Inflation And Aggregate Supply Shock

Philips Curve Case
From few decades, it has remained hot debate among economists that whether it is possible to
achieve two main macroeconomic goals, low inflation and low unemployment, in the particular
economy at the same time? Its remained one of challenge for developing countries to sustain
low inflation at low unemployment rate. In this regard in 1960, the concept of Phillips curve
emerged, named A W Phillips who is the pioneer of the Phillips curve in UK. This curve
suggests negative relationship between the rate of inflation and unemployment. There are three
assumption of Phillips curve; first one is, in short run, there is tradeoff between inflation and
unemployment. Second, aggregate supply shock can break the concept of Phillips curve because
it can cause both higher the rate of inflation and unemployment which is also known as
stagflation. Third, in long run there is no significant tradeoff between inflation and
unemployment. Therefore economists have best interest to identify their relationship; there is a
short run tradeoff between the rate of inflation and unemployment, (McConnell, 16th ed).
In this regard it has been also seen in many studies that there is short run tradeoff between
inflation and unemployment in different countries in different time periods. Though, the rate of