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

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BlackTom AI · Accepted Answer

When we consider the question about what phenomenon in the 1970s challenged the validity of the original Phillips curve, it helps to recall what the Phillips curve represented and what occurred in that decade.
Option a: Full employment. While the notion of full employment relates to low unemployment, it does not capture the paradox that emerged in the 1970s where inflation rose even as unemployment did not fall as expected. Therefore, this option does not describe the phenomenon that challenged the Phillips curve.
Option b: Hyperinflation. Hyperinflation refers to extremely rapid price increases, typically in economies experiencing collapse or extreme instability. The 1970s did not see hyperinflation in the classic sense across the major economies. Thus, this option misidentifies the phenomenon relevant to challenging the Phillips curve.
Option c: Deflation. Deflation is a general decline in prices. The 1970s in many advanced economies did not primarily feature deflation; in fact, inflation was high. Hence, deflation does not describe the critical issue that undermined the original relationship depicted by the Phillips curve.
Option d: Stagflation. This term captures the simultaneous occurrence of stagnation (high unemployment or slow growth) and inflation. The original Phillips curve suggested an inverse relationship between inflation and unemployment, implying that policymakers could trade off one for the other. The 1970s saw high inflation along with weak growth and elevated unemployment in several economies, a combination known as stagflation. This phenomenon directly challenged the simplicity of the Phillips curve model and led to reevaluation of how inflation and unemployment interact, including the role of supply shocks and expectations.
Thus, the identified phenomenon that undermined the original Phillips curve is stagflation, as described in option d.

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

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