Question

The introduction to this chapter suggest that unemployment fell, and inflation generally fell, through most of the 1960s. What face ( Philips stagflation, or recovery) does this represent? Relative to US experience from the 1960s until the 1990s, what was unusual about this?

from chapter 16 of textbook Tregarthen& Rittenberg macroeconomics.

Answer 1

As per traditional experience across most developed nations, as inflation rises, unemployment falls. This trade-off is known as the Philips curve.

The above mentioned phase represents a recovery phase, or a weaker trade-off between unemployment and inflation. Here, the Philips curve will shift to the left.

[The opposite of this phase is when both unemployment and inflation rise, which shifts the Philips curve to the right. This happens during stagflation.]

USA has generally witnessed low inflation and moderate unemployment. The unusual thing about the 1960s was that the typical trade-off was not visible.

The trade-off has been visible for most other periods in time.

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(In recent years, USA has been able to flatten the Philips curve, by keeping both inflation and unemployment low.)