What is the "Phillips curve" in macroeconomics?

The Phillips curve is a fundamental concept in macroeconomics that illustrates the inverse relationship between inflation and unemployment. This relationship suggests that, in the short run, as inflation rises, unemployment tends to decrease, and vice versa. The idea stems from empirical observations made by economist A.W. Phillips, who noticed that when inflation is higher, businesses often expand and hire more employees, leading to lower unemployment rates. Conversely, when inflation is low, unemployment tends to be higher as economic activity slows down.

This concept highlights a trade-off that policymakers may face when trying to balance these two important aspects of the economy. For instance, during economic expansions, policymakers might tolerate a higher rate of inflation to keep unemployment low. However, the relationship is more complex in the long run, often leading to debates and revisions of the theory based on real-world observations, especially in times of stagflation where both inflation and unemployment can be high.

This understanding can inform economic policy decisions, making it crucial for students of macroeconomics to grasp the implications of the Phillips curve on monetary policy and labor market dynamics.