Fig. 73 Fixed targets. The Phillips curve shows that as unemployment (U) falls, inflation (I) increases, and vice-versa. The Phillips curve is drawn as P. Ideally, the authorities would like the economy to be at the origin, point O, for here full employment and complete price stability are simultaneously attained. The Phillips curve, however, sets a limit to the combinations of U and I which can be achieved in practice. Given this constraint, the task of the authorities is to specify ‘acceptable’ target values for the two objectives. They could, for example, set a fixed target value on unemployment at 6% and a target value for inflation at 8%, or, alternatively, a lower value for I and a higher value for U.
The essence of this approach can be illustrated, to simplify matters, by reference to the PHILLIPS CURVE ‘trade-off between unemployment and inflation illustrated in Fig. 73. See MACROECONOMIC POLICY, OPTIMIZING.