Chapter 22

Chapter 22 is titled “the short-run trade-off between inflation and unemployment” and introduced the Phillips Curve which shows the short-run trade-off between inflation and employment. This relates to previous topics learned, such as aggregate demand and aggregate supply, by showing combinations of inflation and employment in the short run as shifts in the aggregate demand curve moves along the short-run aggregate-supply curve. The chapter continues to show the relationship in the equation for unemployment rate that equals natural rate of employment minus actual inflation minus expected inflation. Overall the reason why a rise in inflation leads to a rise in unemployment in the short run is because output can be increased which reduces unemployment at the cost of temporarily increasing inflation, for an estimated less than 10 years. The same can be true of lowering inflation at the cost of increasing unemployment and lowering output. In the long run these are unrelated issues because they are fundamentally different; inflation relates to growth in money supply and unemployment relates to the labor market.