1. Keynesian view of the Phillips Curve

2. With an increase in output from Y1 to Y2 there must be an increase in the amount of labour used (less unemployment)

3. Monetarist View of the Phillips Curve

4. Monetarist View of the Phillips Curve
Equilibrium is at A and inflation is at P1
There is an increase in AD and firms increase wages to encourage more workers to supply their labour
Workers have money illusion (think they have higher real wages) and supply more labour
Firms can supply more
There is a temporary movement along the SRAS curve to Z
Workers realise that inflation has increased and adjust their expectations (the increase was only nominal)
Workers supply less labour
Output returns to Yf at point B
There is no trade off between unemployment and inflation in the long run – the long run AS curve is inelastic and therefore any increase in AD will only lead to inflation
Monetarist View of the Phillips Curve

5. So who is right?