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Chapter 1: Q10. (page 17)

How are inflation and unemployment related in the short run?

Short Answer

Expert verified

Inflation and unemployment are negatively related in the short run.

Step by step solution

01

Inflation and unemployment

Inflation refers to increasing prices as an economy progresses. Unemployment refers to the unused potential of the country in terms of human resources.The two factors are growth indicators of an economy.

02

Relation between inflation and unemployment  in the short run

In the short run, inflation and unemployment are inversely related. This can be understood by the effect of an increase in aggregate demand. Higher aggregate demand leads to higher prices (inflation) as too much money is chasing few goods; these high prices encourage firms to increase their production and employ more people—the increase in hiring leads to a low unemployment level. Thus, higher inflation comes with a lower unemployment level.The Phillips curve gives this relationship.

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