The Original Philips Curve showed “an inverse relationship between the rate of change in money wage rates and the unemployment rate” (Boyd, n.d.). The explanation given by the Keynesians was that if unemployment is low, workers will work only if they are paid handsomely, and they would demand a higher nominal wage rate. As nominal output growth is equal to the sum of price growth (π) and real output growth (gY), and nominal aggregate demand is equal to nominal aggregate supply (gD), then gD = π + gY. Inflation according to Keynesians is therefore the difference between the nominal aggregate demand and real output growth π = gD – gY (The Inflation Acceleration Controversy, n.d.).
If the nominal wage demand exceeds the productivity growth, firms would pass the cost of paying higher wages onto the customers as higher prices. For simplicity assuming there is no productivity growth, low unemployment will result in high inflation which is depicted below by the Philips Curve.
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