In the 1970s, very long ago that they may be,
actually turn out to be a very good laboratory for
exploring the causes of and cures for an inflationary spiral, and for
the introduction of a very useful tool known as the Phillip's curve.
[MUSIC]
The Phillip's curve was developed by English economist A.W.
Phillips from his study of more than a century's worth
of data on unemployment and money wages in the United Kingdom.
[SOUND] From his data analysis, Phillip's found an inverse
relationship between the rate of inflation and
the rate of unemployment, to it as the unemployment rate falls,
the more robust GDP growth rate, the inflation rate rises.
To convey the idea of the Phillip's curve,
take a look at the aggregate supply, aggregate demand model in this figure.
Holding the aggregate supply curve steady, we start at AD not,
but an increase in aggregate demand shifts the AD curve
upwards from AD1, to AD2, and eventually to AD3.