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

Question

BlackTom AI · Accepted Answer

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

Option a: Hyperinflation. While hyperinflation is a drastic inflationary scenario, it is not the phenomenon that primarily tested the Phillips curve's premise. The original curve linked unemployment and inflation in a trade-off, not the extreme case of runaway prices due to monetary collapse.

Option b: Deflation. Deflation represents falling price levels and, although it presents different economic dynamics, it does not capture the 1970s challenge to the Phillips framework, which was about high inflation occurring alongside high unemployment rather than persistent deflation.

Option c: Stagflation. Correct. Stagflation refers to the unusual combination of high inflation and high unemployment occurring simultaneously, a situation the original Phillips curve (which posited an inverse relationship between inflation and unemployment) could not explain. The 1970s oil price shocks and supply-side constraints produced this atypical mix, undermining the curve’s predictive power.

Option d: Full employment. This term describes a desirable state with low unemployment, not a phenomenon that undermined the Phillips curve. It does not reflect the paradoxical combination of inflation and unemployment seen in the 1970s.

Summary: The core issue is that stagflation demonstrated that high inflation and high unemployment can occur together, contradicting the original Phillips curve’s implied trade-off and prompting the development of new theories (e.g., expectations-augmented Phillips curve) to account for expectations and supply shocks.

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

View Explanation

Log in for full answers

Similar Questions

If there were stagflation in the economy caused by a decrease in aggregate supply:

Stagflation refers to a situation characterized by -

A cost shock in the economy may lead to -