R/s between Unemployment & Inflation

• Unemployment is when people who want to work cannot find jobs
• The Phillips Curve shows that there is an inverse relationship between unemployment and inflation, with lower levels of unemployment associated with higher levels of inflation.
• Inflation is the rate at which prices are rising
• Phillips Curve


  Shows the relationship between the rate of inflation and the level [or rate] of unemployment
• Phillips Curve


  • Suggests there is a trade-off [or stable and inverse/negative relationship] between inflation and unemployment
  • Any point along the curve relates to a combination of an unemployment rate and an inflation rate
• Economic growth


  Leads to inflation, which in turn should lead to more jobs and less unemployment
• Points on the Phillips Curve

  • If unemployment rate is 2%, inflation rate is 10%
  • If unemployment decreases to 1%, inflation rate increases to 15%
  • If unemployment increases to 6%, inflation rate drops to 2%
• The original Phillips Curve concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment
• Stagflation


  An economic phenomenon in which an economy experiences a recession such that, there is stagnant economic growth, high unemployment and high price inflation
• Soaring oil prices


  Raised the cost of production and created unprofitable enterprises, slowing economic growth
• Expansionary monetary policy


  Counteracted the slowing of economic growth, creating a wage price spiral and inflation
• Stagflation was the result of trying to counteract a recession with expansionary monetary policy
• Government policy implications of the Phillips Curve

  • Government cannot simultaneously achieve low inflation and low unemployment
  • If it targets zero inflation, it has to put up with high unemployment
  • If it targets zero unemployment, inflation will be very high
  • The slope of the curve allows government to recognise that any decrease in unemployment when the unemployment rate is already low, will result in larger increases in the inflation rate
• Long-run Phillips Curve


  Vertical at the natural rate of unemployment, because in the long-run, there are no trade-offs between unemployment and inflation
• Inflation is the rate at which prices are rising over time
• In the short run, if the government wants to reduce unemployment, they can increase demand by increasing government spending or reducing taxes, leading to increased production and employment.
• There is no long-term trade off between unemployment and inflation as it depends on the economy's structure and policy choices made by governments.
• Phillips curve suggests that if governments try to reduce unemployment below its 'natural' level by increasing demand through expansionary fiscal policy or monetary policy, this will lead to higher than expected inflation.
• If the government tries to control inflation through monetary policy (e.g., raising interest rates), it could also cause unemployment to rise as businesses cut back on investment and lay off workers.
• Causes of hyperinflation include war, political instability, excessive money supply growth, and fiscal deficits
• Unemployment and inflation have an inverse relationship in the short term but not in the long term.
• Wage rigidity refers to the reluctance of employers to lower wages during periods of economic downturn, causing firms to layoff employees instead.
• In the long run, there is no trade-off between unemployment and inflation due to structural factors such as labour market rigidities and supply side constraints.
• Monetarists argue that the Phillips curve shifts outwards over time due to expectations of future inflation.
• Hyperinflation leads to high levels of inflation, loss of confidence in currency, and economic collapse
• The Phillips Curve shows an inverse relationship between unemployment and wage inflation, with lower unemployment associated with higher wages.
• Governments may use contractionary policies such as tightening monetary policy, cutting public expenditure, and raising taxes to combat hyperinflation
• As the economy moves along the short-term Phillips Curve, the relationship between inflation and unemployment becomes less positive due to factors such as unions becoming stronger and demanding higher wages, leading to further rises in inflation.
• If governments aim to keep unemployment above its 'natural' level, they can achieve low inflation without any negative effects on employment.
• Expansionary monetary policy involves central banks reducing interest rates, making borrowing cheaper and encouraging people to spend money, which increases demand and employment but also causes inflation.
• If governments try to reduce unemployment by increasing demand through expansionary fiscal or monetary policy, this can lead to rising prices (inflation) if aggregate supply cannot keep up with increased demand.
• New classical economists suggest that rational expectations prevent any sustained deviation from full employment.