The Short-Run and Long-Run Relationship Between Unemployment and Inflation

Unemployment and inflation are an economy’s two most important macroeconomic issues. The federal government’s fiscal policy and the Federal Reserve’s monetary policy try to maintain both a low unemployment rate around a natural rate and a low inflation rate around 2%. In your Final Paper, Evaluate the historical relationship between unemployment and inflation.

Quick Response

Comprehension of the relationship between unemployment and inflation can be brought up using The Philips Curve. The curve demonstrates an inverse relationship between the two macroeconomic issues where inflation increases while unemployment decreases(Forder, 2014). The relationship is not linear. The Philips Curve is not used for policy development; however, it can be used to demonstrate how unemployment rates influence inflation. A decrease in unemployment translates to increased demand for employees. This instance leads to increased GDP output, which inspires an increased price level. The resulting outcome includes a demand-pull inflation consequence. Such a scenario is best illustrated using the Aggregate Demand and Aggregate Supply Demand curve.

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