Recent evidence suggests that the Phillips curve has flattened. An article in the Economist states: “A flatter Phillips curve is good news when unemployment is falling. But it also implies bad news if inflation rises significantly.”
a. If firms find it difficult to raise prices, why might the result be a flatter Phillips curve?
b. How would the effect of a demand shock be different if the Phillips curve is relatively flat than if its relatively steep?
c. Why does the article argue that a flatter Phillips curve may be bad news if there is high inflation?