Conflicts
Unemployment v inflation: by creating unemployment through less government spending demand
will fall leading to lower inflation
Economic growth v the balance of payments: higher
Economic growth v inflation- a positive output gap will lead to increased demand and resultant
inflationary pressures
Phillp curve
- studied the relationship between unemployment could be traded off against a certain level of
inflation, as unemployment goes down prices go up.
In the short run, the Phillips Curve is downward sloping.
In the long run, it is vertical
Full employment
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Full employment is the natural rate of employment
NOT 100% employment, those who want work are working
Always will be frictional and structural unemployment
4-5% is deemed acceptable by most
If unemployment is HIGH, this is a sign of a inflationary
Suggests that changes in employment have direct predictable effects on inflation
Stagflation- unemployment increases and so does inflation ( high inflation and high employment at
the same time)
As more people become employed AD rises which contributes to demand pull inflationary pressures.
The L- shaped Philip curve demonstrates that any attempt to reduce unemployment below its
natural state will lead to inflation.
A change in AS will lead to a shift in the SPAC, a change in demand will lead to movement along the
curve.
Economic Cycle
Positive gap
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Low unemployment
High inflation
Negative Gap
-High unemployment
-Low inflation