How does inflation affect unemployment?

Can you explain how inflation impacts unemployment rates?

Sure! Inflation can affect unemployment in various ways, often through the concept of the Phillips Curve, which suggests an inverse relationship between inflation and unemployment.

What happens during high inflation?

During high inflation, purchasing power decreases, which can lead to reduced consumer spending. Businesses may respond by cutting jobs, potentially increasing unemployment.

Are there any exceptions to this relationship?

Yes, there are exceptions. For instance, during stagflation, both inflation and unemployment can rise simultaneously, defying the typical inverse relationship.

How do central banks respond to inflation?

Central banks often raise interest rates to combat inflation, which can slow down economic growth and potentially increase unemployment.