1. What is the Phillips Equation?

The Phillips curve represents an inverse relationship between inflation and unemployment. The equation π = π_e - α(U - U_n) shows how actual inflation depends on expected inflation and the deviation of unemployment from its natural rate.

2. How Does the Calculator Work?

The calculator uses the Phillips equation:

Where:

• π — Actual inflation rate (%)
• π_e — Expected inflation rate (%)
• α — Coefficient showing the responsiveness of inflation to unemployment
• U — Actual unemployment rate (%)
• U_n — Natural rate of unemployment (%)

Explanation: The equation shows that when unemployment is above its natural rate, inflation tends to be below expectations, and vice versa.

3. Importance of the Phillips Curve

Details: The Phillips curve is fundamental to macroeconomic policy, helping central banks understand the inflation-unemployment trade-off when setting monetary policy.

4. Using the Calculator

Tips: Enter expected inflation (%), the alpha coefficient, actual unemployment rate (%), and natural unemployment rate (%). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical value for α?
A: The value varies by economy and time period, but is typically between 0.2 and 0.5 in modern economies.

Q2: How is expected inflation (π_e) determined?
A: It can be based on surveys, past inflation rates, or central bank inflation targets.

Q3: What affects the natural rate of unemployment?
A: Factors like labor market institutions, demographics, technology, and education levels influence U_n.

Q4: Does the Phillips curve always hold?
A: The relationship can weaken or change over time, especially during periods of stagflation or very low inflation.

Q5: How do policymakers use this equation?
A: It helps assess the inflationary impact of reducing unemployment or the unemployment cost of reducing inflation.