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Two things determine the location of the Phillips curve: the expected rate of inflation and the natural rate of unemployment. The Phillips curve must pass through that point on the graph at which actual inflation is equal to expected inflation, and at which the actual rate of unemployment is equal to the natural rate of unemployment. Any shift in the natural rate of unemployment (and the natural rate of unemployment can shift) will shift the Phillips curve to the left or the right. Any shift in expected inflation (and expected inflation does shift) will shift the Phillips curve up or down. The Phillips curve is steep when so-called nominal rigidities in the economy are few and weak—and thus when prices respond quickly and substantially to changes in demand. Nominal rigidities are weak when Labor unions have few members, when long-term contracts contain many automatic price escalator clauses, when there are few long-term contracts, and when people expect inflation to be volatile and thus adjust their plans according to what changes in inflation they see.
Approximate Word count = 533
Approximate Pages = 2.1
(250 words per page double spaced)
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