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Table of Contents

  1. Topic pack - Macroeconomics - introduction
  2. 2.1 The level of overall economic activity (notes)
  3. 2.1 The level of overall economic activity (questions)
  4. Section 2.2 Aggregate demand and supply (notes)
  5. Section 2.2 Aggregate demand and supply (simulations and activities)
  6. 2.2 Aggregate Demand and Aggregate Supply (questions)
  7. 2.3 Macroeconomic objectives (notes)
  8. Low Unemployment
    1. Low Unemployment
    2. What the data says
    3. The meaning of unemployment
    4. Case study - regional variation
    5. Consequences of unemployment
    6. Case study - tougher for men
    7. Types and causes of unemployment
    8. Disequilibrium unemployment
    9. Equilibrium unemployment
    10. Policies to reduce unemployment
    11. Low and stable inflation
    12. Low and stable inflation (notes)
    13. The meaning and measurement of inflation
    14. A consumer price index
    15. Finding out more about consumer price index weights
    16. Problems with measuring inflation
    17. Inflation - videos
    18. Consequences of inflation
    19. Hyperinflation
    20. The consequences of deflation
    21. Types and causes of inflation: demand-pull inflation
    22. Types and causes of inflation: cost-push inflation
    23. Case Study - car prices in Trinidad
    24. Possible relationships between unemployment and inflation
    25. PlotIT - Phillips curve
    26. Phillips curve - long-run
    27. Natural rate of unemployment
    28. NAIRU
    29. Economic growth
    30. Economic growth (notes)
    31. Causes of economic growth
    32. Economic growth and the PPF (1)
    33. Economic growth and the PPF (2)
    34. Economic growth and the business cycle
    35. Economic growth and the aggregate supply curve
    36. Consequences of economic growth
    37. Equity in the distribution of income
    38. Equity in the distribution of income (notes)
    39. Indicators of income equity
    40. Poverty
    41. The poverty line: An Indicator of Relative poverty
    42. The causes of poverty
    43. The role of taxation in promoting equity
    44. The role of taxation in promoting equity (notes)
    45. Other methods of promoting equity
  9. 2.3 Macroeconomic objectives (questions)
  10. 2.4 Fiscal policy (notes)
  11. 2.4 Fiscal policy (questions)
  12. 2.5 Monetary policy (notes)
  13. 2.5 Monetary Policy (questions)
  14. Section 2.6 Supply-side policies (notes)
  15. 2.6 Supply-side policies (questions)
  16. Print View

Possible relationships between unemployment and inflation

Syllabus: Discuss, using a short-run Phillips curve diagram, the view that there is a possible trade-off between the unemployment rate and the inflation rate in the short run.

Achieving one Government Macroeconomic Objective can often have an adversr effect on a different objective. For example, a large balance of payments Current Account (BoP - CA) deficit might cause a fall in the exchange rate and thereby impact adversely on the rate of inflation. In the same way there is often thought to be a short term trade-off between unemployment and inflation.

You can see this if you think of Aggregate Demand as the linking variable. If AD increases (for whatever reason) it will put downward pressure on unemployment and upward pressure on inflation. This trade-off was first encapsulated in the Phillips Curve - see interaction below:

If you would prefer to view this interaction in a new web window, then please follow the link below:

Using the Phillips Curve relationship meant that Governments felt much more in control of the economy (If we accept a bit of inflation we can reduce unemployment and vice versa - we are all keynesians now!) And there was a rubbing of politicians hands as they adopted demand mangement approaches to manging the economy.

But then came stagflation! In the late 1960īs and 1970`developed economies began to experience rising inflation and rising unemployment at the same time. With hindsight it was cleary major cost- push inflationary pressures that caused the rising inflation but policy-makers kept decreasing AD and wondered why inflation was unaffected and unemployment kept increasing. Economists were baffled until Milton Friedman (the Monetarist/Free Market economist) burst onto the scene with his critique of the Phillips curve which became known as the  'long-run' or 'expectations-augmented' Phillip's Curve, (explained on the next page - Page