[PDF Notes] Here is your short essay on Stagflation

During 1960s, Phillips curve remained popular among the economists and the policy-makers and there was general agreement that a stable and enduring trade-off existed between unemployment and inflation.

Since about 1967 onwards, the major industrialised countries of the world are experiencing simultaneous growth of inflation and unemployment.

This new phenomenon of the existence of high inflation coupled with high unemployment has been termed as stagflation.

The experience of stagflation runs counter to the prediction of the Phillips curve that there exists an inverse relationship between inflation and unemployment.

Diagrammatically, the phenomenon of stagflation leads to an upward shift in the Phillips curve indicating that a given level of unemployment is associated with higher rate of inflation.

Thus, the existence of inflation and unemploy­ment simultaneously has led to the collapse of Phillips curve trade-off, rendered the Phillips curve unstable and reduced its predictive power.

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