What it is:
How it works (Example):
Phillips posits that low levels of unemployment lead to higher prices. As more people become employed, wage levels increase. Broad increases in wages lead to higher demand for goods and services. This upward shift in demand results in higher prices (also called demand-pull inflation).
Why it Matters:
The Phillips curve comprises two economic variables which monetary policy-makers are responsible for maintaining at low levels: unemployment and inflation. The inverse nature of the Phillips curve shows that maintaining a low level in either one leads to a likely increase in the other. For this reason, monetary strategists and policy-makers need to strike an effective balance between inflation and unemployment.