Question

7.9 3.3 2. Consider the following data from 2001 - 2017, column 1 is the year, the 2nd column is the unemployment rate, and the 3rd column is the inflation rate. Plot the data using a scatter plot and argue whether in your opinion, the Phillips Curve has validity. 2001 5.7 1.6 2002 6.0 2.4 2003 5.7 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 4.1 3.0 0.7

Answer 1

The Phillips Curve shows that there is an inverse relationship between the rate of inflation and the level of unemployment i.e. when there is high inflation there is low unemployment and when there is low inflation, there is high unemployment.

The data in your table is plotted using a scatter plot below:

Scatter Plot Chart Area 9 8 7 6 4 3 2 1 - 0 12 10 8 6 4 2 Unemployment Rate Inflation Rate C

As explained above, the Phillips Curve would only have validity if there would be an inverse relationship between inflation and the unemployment rate. But, from the scatter diagram we don't see any such relationship as explained by the Phillips Curve. When the inflation rate is the highest from 2001-2017, in 2003 i.e. it is 7.9%, the unemployment rate is same as it was when the inflation rate was much lower in 2001 at 1.6%. On the other hand, when the unemployment rate was the highest among the given years in 2009 at 10.1%, the inflation rate was somewhere at the middle at 2.7%.

So, according to the data, in my opinion, the Phillips Curve has no validity.