How did the inflationunemployment relationship change in the

How did the inflation-unemployment relationship change in the post- 1970s?

Solution

How did the inflation-unemployment relationship change in the post- 1970s?

The relationship between inflation and unemployment is well represented by the Phillips curve. It denotes the trade-off between the two. The dominant school of thought in the 1960s suggested that the economy was likely to experience either a recessionary gap or an inflationary gap. An economy with a recessionary gap would have high unemployment and little or no inflation. An economy with an inflationary gap would have very little unemployment and a high rate of inflation.

It was an unhappy surprise in the 1970s that the unemployment increased as expected but inflation rose to. The relationship between unemployment and inflation as depicted in the Phillips curve no longer prevailed. It was the economist and Nobel laureate Paul Samuelson who suggested a combination of a stagnating economy and continued inflation or coined as Stagflation. He also added there is a recovery phase in which inflation and unemployment both decline. This stagflation phase began in the late 1970s, the economy suffered its highest rate of unemployment since the Great Depression, but it also achieved its dramatic gains against inflation.

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