Unemployment And Inflation - The Philips Curve Concept

Question 1

What does the Philips curve explore

Answer 1

The relationship between inflation and unemployment

Question 2

What does the Philips curve suggest

Answer 2

Falling unemployment might cause inflation - there is a short run trade off between unemployment and inflation

Question 3

What could the government want to do if they wanted to reduce the unemployment rate

Answer 3

Increase AD but, although this might temporarily increase employment, it could also have inflationary effects

Question 4

Possible inflationary effects in the labour markets from an increase in national income, output and employment

Answer 4

Unemployment falls labour shortages may occur where skilled labour is in short supply - this puts pressure on wages to increase and prices may rise as businesses pass on these costs to their consumers

Question 5

Where can inflation also come from other than the labour market

Answer 5

Cost push inflation from rising demand for commodities

Question 6

Inflationary pressures from product markets

Answer 6

Rising demand = suppliers raising prices to increase their profit margins- the risk of rising prices is greatest when demand is out-stripping supply-capacity leading to excess demand (positive output gap)

Question 7

When can the possible conflict between unemployment and inflation be moderated

Answer 7

• the economy achieves higher labour productivity (raises efficiency and reduces costs and increases wages which increases demand)
• innovation allows businesses to produce new products at cheaper costs
• expectations of inflation remain stable
• workers are prepared to accept cuts in real wages to keep their jobs
• the economy can cope with external demand and supply-side shocks