Macroeconomics

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:

• Phillip's curve

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 1960´s 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