What phenomenon in the 1970s challenged the validity of the original Phillips curve?

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BlackTom AI · Accepted Answer

Revisiting the question, we need to evaluate what in the 1970s contradicted the original Philips curve idea.
Option a: 'Full employment'—While full employment is a goal associated with low unemployment, it does not capture the core conflict of the 1970s. The era saw rising unemployment at times alongside high inflation, so full employment does not explain the breakdown of the curve.
Option b: 'Deflation'—Deflation did not define the central phenomenon in the 1970s. The period was characterized by high or rising price levels rather than a general decline in prices, so this option misses the key puzzle.
Option c: 'Hyperinflation'—Hyperinflation is extreme inflation and did not typify 1970s Western economies. The inflation rates were high but not on the hyperinflation scale, making this a misfit for describing the challenge to the Phillips curve.
Option d: 'Stagflation'—This is the correct framing of the 1970s puzzle. Stagflation refers to simultaneous inflation and stagnant (high) unemployment, which contradicts the original Phillips curve’s inverse relationship between inflation and unemployment. The occurrence of stagflation led economists to question whether the simple trade-off implied by the Phillips curve held in real-world conditions and spurred the development of new theories about inflation expectations and supply-side factors.

What phenomenon in the 1970s challenged the validity of the original Phillips curve?

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