Question

The Phillips curve shows the trade off between inflation and unemployment

- what measures should/could be taken to move the Phillips curve to the left (inwards) . Refer to "Supply side economics"

- do we still believe in the trade off between inflation and unemployment?  

Answer 1

The leftward movement of the Phillips curve, means at each inflation rate, unemployment rate decreases. It can happen using supply side measures and policies. The first measure is to lower the corporate tax. It will encourage the firms to increase the supply. It reduces the price of goods and inflation rate decreases or at a given inflation rate, more people are employed. The second measure is the offering subsidies that lead to lower the price level at a given unemployment rate. It happens when there is a leftward movement of the Phillips curve. The third measure is to support the R&D work by offering rebates or other benefits to the firms. It will also deliver the desired results in the form of leftward movement of the Phillips curve.

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There is a clear indication that when more people are employed, then aggregate demand increases and price level increases in the economy. It means that lower unemployment level, leads to higher inflation rate. So, in the short run, Philips curve works and establishes the relationship. In the long run, unemployment is at a natural rate of unemployment, even if the price increases or decreases. It is the reason that in the long run, Phillips curve is a vertical line. Hence, such relationship is clearly evident in the short run.