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Answer:
Definition of Phillips curve
Phillips curve explains the tradeoff relationship between inflation and unemployment rate. It means if unemployment rate increases, the rate of inflation will decrease and vice-versa.
Justification for Phillips curve performance
The tradeoff between inflation and unemployment happens when there is a demand shock in an economy. Since most of the economies faced demand shock during the perioD₁954 to 1969, the Phillips curve worked much better during this time.
If there is supply shock in an economy, then inflation unemployment tradeoff would not exist. In the₁970s, most of the economies faced the supply shock; hence, the Phillips curve did not seem to work better in this period.
Answer:
Rejecting inflation unemployment tradeoff is incorrect
When inflation and unemployment fell together in the₁990s, some observers claimed that policy makers no longer faced a trade-off between inflation and unemployment.
This observation is incorrect because inflation and unemployment will fall/rise together when there is a supply shock in an economy. On the other hand, tradeoff between inflation and unemployment occurs when there is a demand shock in an economy.
Hence, rejecting inflation unemployment tradeoff based on supply shock analysis is incorrect.