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

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

Option a. Full employment — The original Phillips curve linked inflation and unemployment, suggesting that lower unemployment came with higher inflation. Full employment on its own does not describe a mismatch between inflation and unemployment that would challenge the curve; it merely reflects a situation where unemployment is low, which, according to the curve, would be associated with higher inflation, not inherently contradictory.

Option b. Deflation — Deflation is a decrease in the general price level. While deflation presents a different inflationary environment than the Phillips curve originally contemplated, simply having deflation does not directly illustrate the breakdown of the inverse relationship between inflation and unemployment that the curve posited. It does not capture the classic stagflation issue.

Option c. Hyperinflation — Hyperinflation is extraordinarily high inflation, often accompanied by rapid price increases and economic instability. Although extreme inflation complicates macroeconomic dynamics, the core challenge posed to the Phillips curve in the 1970s was not merely hyperinflation itself but the coexistence of high inflation with high unemployment, which the curve struggled to explain.

Option d. Stagflation — Stagflation refers to the simultaneous occurrence of high inflation and high unemployment (and stagnant demand) during the same period. This combination contradicted the original Phillips curve’s implied inverse relationship between inflation and unemployment, showing that high inflation could coexist with high unemployment, thereby undermining the curve’s explanatory power.

Summary: The key misalignment highlighted by the 1970s experience was the emergence of stagflation, where high inflation and high unemployment occurred together, challenging the notion of a stable trade-off depicted by the original Phillips curve. The other options miss this core paradox or describe phenomena that do not capture the central contradiction that stagflation revealed about the Phillips curve model.

SESS0008_24-25 MCQ test (30 minutes)

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

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