In the 1970s, why did the short-run Phillips curve fail to depict the unemployment–inflation trade-off?
What will be an ideal response?
The 1970s were affected by the twin OPEC oil embargoes, which shifted the aggregate supply curve inward. The Phillips curve depicts the inflation–unemployment trade-off due to AD shifts. When AS decreased in the 1970s, inflation and unemployment worsened simultaneously. It appeared that the Phillips curve shifted outward, offering worse choices of inflation and unemployment than had been offered in the past. This is the case when AS decreases.
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