Answer to Question #144919 in Macroeconomics for XYZ

Question

Do you think tradeoff between inflation and unemployment exist? Explain in detail. Also explain it's relevance for policy use.

Answer 1

Newspaper articles and public debates about economic policy often talk about the trade-off between inflation and unemployment. The idea is that in order to reduce inflation, the economy must accept high unemployment, or vice versa, to reduce unemployment, it must accept higher inflation.

The source of the idea of ​​a trade-off between inflation and unemployment was a 1958 article by the economist A.W. Philliis. Phillips examined 97-year UK data on unemployment and nominal wage growth and found that historically unemployment was low in years when wages rose rapidly and high in years when nominal wages rose slowly. Economists who relied on Phillips' work shifted the search somewhat, looking for a link between unemployment and inflation — that is, rising price levels — instead of a link between unemployment and wage growth. Throughout the 1950s and 1960s. Many statistical studies have tested inflation and unemployment data for many countries and time periods, in many cases finding a negative relationship between the two variables. This negative empirical relationship between unemployment and inflation is known as the Phillips curve.