What is the relationship between inflation and unemployment?

What is the relationship between inflation and unemployment?

The relationship between inflation and unemployment is often described by the Phillips Curve, which suggests that there is an inverse relationship between the two. When inflation is high, unemployment tends to be low, and vice versa.

Can you explain the Phillips Curve in more detail?

Sure! The Phillips Curve illustrates that as inflation rises, unemployment tends to decrease because businesses are more likely to hire when they can charge higher prices. However, this relationship can vary over time due to factors like expectations of inflation.

Are there any exceptions to this relationship?

Yes, there are exceptions. For instance, during stagflation, which occurred in the 1970s, both inflation and unemployment rose simultaneously, challenging the traditional Phillips Curve.

How do central banks respond to inflation and unemployment?

Central banks often adjust interest rates to manage inflation and unemployment. For example, they may raise rates to combat high inflation, which can increase unemployment, or lower rates to stimulate the economy and reduce unemployment, potentially increasing inflation.