Answer to Question #67357 in Microeconomics for Sachin Tandukar

Question

Many consider unemployment and inflation as two conditions that are not likely to exist at the same time. Explain why inflation is not likely when unemployment is relatively high?

Answer 1

The trade-off between inflation and unemployment was first reported by A. W. Phillips in 1958—and so has been christened the Phillips curve. The simple intuition behind this trade-off is that as unemployment falls, workers are empowered to push for higher wages. Firms try to pass these higher wage costs on to consumers, resulting in higher prices and an inflationary buildup in the economy. The trade-off suggested by the Phillips curve implies that policymakers can target low inflation rates or low unemployment, but not both.
Source: https://www.dollarsandsense.org/archives/2006/0906drdollar.html