Inflation and Unemployment

Read this chapter to examine the relationship between inflation and unemployment. As you will see, while there have been some periods in which a trade-off exists between inflation and unemployment, there are also periods in which such clear-cut negative relationship between these variables falls apart. The chapter offers some explanations for these variable behaviors and the stabilization policies that are used to address undesirable trends in the variables.

1. Relating Inflation and Unemployment

Key Takeaways

  • The view that there is a trade-off between inflation and unemployment is expressed by a short-run Phillips curve.
  • While there are periods in which a trade-off between inflation and unemployment exists, the actual relationship between these variables is more varied.
  • In a Phillips phase, the inflation rate rises and unemployment falls. A stagflation phase is marked by rising unemployment while inflation remains high. In a recovery phase, inflation and unemployment both fall.