There may be a temporary trade off between inflation and unemployment but there is no permanent
“There may be a temporary trade-off between inflation and unemployment but there is no permanent trade off.” In this essay I will be discussing the factors of both inflation and unemployment and whether and to what extent there is a trade off between the two. Firstly I will define both unemployment and inflation. The definition of unemployment is the number of workers without a job who are willing and able to work. Unemployment can come under many forms, these include frictional, seasonal, cyclical and voluntary. (Business Studies, Hall, 00) The definition for inflation is the rise in general prices and the reduction in value of money. ... Begg) Inflation is a sustained increase in the general price level. ... It is fair to say that full employment, in conjunction with a very low or zero inflation rate, is the ideal situation for the government. At the other extreme, the nightmare scenario is that of stagflation in the economy, when the economy stagnates at a low level of employment with the inflation rate continuing to rise. The Phillips Curve is a main tool in the essay question I am answering it shows a relationship between unemployment and inflation discovered by Professor A. ... He found that there was a trade-off between unemployment and inflation, so that any attempt by governments to reduce unemployment was likely to lead to increased inflation. ... The curve sloped down from left to right and seemed to offer policymakers a simple choice that you have to accept inflation or unemployment and could not control both to the level that you wanted. ... When, unemployment is low, it causes prices to rise as there is high aggregate demand in the economy this causes demand pull inflation. Demand-pull inflation occurs when an increase in aggregate demand is caused by one or more of increases in; government spending, investment by firms, consumption or a positive increase in the balance of payments. ... The Phillips Curve was seen by Keynesians as a way for the government to use fiscal and monetary policy to determine aggregate demand and the extent of involuntary unemployment within the economy. ... When influencing the level of demand in the economy, the government tend to use Demand Management Policies this is in order to control macro economic variables such as inflation and unemployment. ... Although by doing this, unemployment is likely to be increased as consumers will have less disposable income and this will mean consumption within the economy will fall. However, in the 1970s the curve began to break down as the economy suffered from unemployment and inflation rising together, which is known as stagflation.