Here's a trip through Macro theory. What is the Phillips Curve

The Phillips curve shows the trade-off between inflation and unemployment. In the short run, decrease in unemployment can lead to increase in inflation but in the long run inflation and unemployment are not related meaning the Philips curve is vertical in the long run at the natural rate of unemployment. Friedman and Phillips developed a theory called non-accelerating inflation rate of unemployment (NAIRU) which states there would be only temporary decrease in unemployment from expansionary economic policies because the economy will adjust to the natural rate. When unemployment is above the natural rate, inflation will decelerate. When unemployment is below the natural rate, inflation will accelerate. When the unemployment rate is equal to the natural rate, inflation is stable, or non-accelerating.

Philip's curve in general explains the inverse relationship between the unemployment rate and the inflation rates. The original Philip's curve while fixing the wage and price does not take the expected or anticipated inflation in to account. The original Philip's curve simply implied that there exists an inverse relationship between the growth rate of money wages and the unemployment rate. The modern Philip's curve was given by Friedman and Phelps and shows that there exists an inverse relationship between the inflation rate and unemployment .Original Philip's curve didn't take the inflation in to account. The modern Philip's curve incorporates both the short run and the long run Philip's curve also incorporates the expected inflation. Friedman and Phelps introduced expected inflation as an factor which influences the growth rate of the money wages. When the expected inflation is higher there is greater demand from the workers to increase their wages. The firms are also ready to give high wages to the workers as the firms also expects that prices will also increases in the future and thus firms expect that their profits will also increases in the future. Thus compared to the original Philip's curve ,modern Philip's curve depicted that unemployment not only depends on the level of inflation but also depends on the excess of inflation over the expected values. According to the modern Philip's curve ,the unemployment will depend on the level of inflation and the excess of wage inflation. In the short run Philip's curve there is trade off between the inflation and the unemployment where as in the long run Philips curve there is no trade off between the inflation and the unemployment. In the long run Philip's asserted that the inflationary policies will not help in reducing the unemployment .The long run Philip's curve is shown as the vertical line and depicts that the inflation will not have any effect on the unemployment.

The short run Philip's curve is L shaped and depicts that there is inverse relationship between the inflation and the unemployment. The main reason of the abandonment of the Philip's curve by the monetarists was that there is no trade off between the inflation and unemployment in the long run.

H