Learning Objectives
By the end of this section, you will be able to do the following:- Explain the Phillips curve, noting its impact on the theories of Keynesian economics
- Graph a Phillips curve
- Identify factors that cause the instability of the Phillips curve
- Analyze the Keynesian policy for reducing unemployment and inflation
The simplified AD/AS model we have used so far is fully consistent with Keynes’s original model. More recent research, though, has indicated that in the real world, an aggregate supply curve is more curved than the right angle used in this chapter. Rather, the real-world AS curve is very flat at levels of output far below potential—Keynesian zone—very steep at levels of output above potential—the neoclassical zone—and curved in between—the intermediate zone. This is illustrated in Figure 11.18. The typical aggregate supply curve leads to the concept of the Phillips curve.