The paper "The Relationship between Inflation and Unemployment" is a wonderful example of an assignment on macro and macroeconomics. The evaluation of the aggregate economy entails, in part, a consideration of unemployment and inflation as two essential elements. The relationship between inflation and unemployment has been a topic of controversy over time. Different economists have had varying opinions supporting or opposing the existence of this relationship. Unemployment can be defined as a situation whereby people are ready to work but can’ t find work to do (Ormerod, Rosewell & Phelps, 2013). Unemployment is usually measured by the rate of unemployment, also referred to as the labor force percentage.
Inflation, however, refers to a rise in overall price levels in an economy. Philip’ s curve was postulated in 1958 by A. W. Philips who explained the existence of employment and inflation trade-off. Philips Curve The implication of the Philips curve was that low unemployment and low inflation could only be targeted separately but the policymakers but not together. The idea that was used to explain this was on the basis that the Labour force pushed for wages that were higher as the economy realized a fall in its employment level.
The economy will have a build-up of inflation that results from the high prices. This happens as the consumers are made to carry the burden of higher costs of wages which the firms pass on to them. Job creation (low unemployment) was the major emphasis of the Keynesians, during the 1960s, while price stability (low inflation) was the emphasis of the monetarists. (Hoogenveen & Kuipers, 2012) The earlier notion of an existing trade-off between unemployment and inflation that was stable began to be progressively discredited especially in the simultaneous rise in both in the 1970s.
This stagflation made many economists shifted focus from the choice of either low inflation or low employment. The attention was directed towards the achievement of a ‘ natural’ rate in the economy.
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