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In: Economics

Explain the trade off between inflation and unemployment. Draw a Phillips Curve that illustrates this trade-off.

Explain the trade off between inflation and unemployment. Draw a Phillips Curve that illustrates this trade-off.

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Expert Solution

There exists a short run trade off between inflation and unemployment. This short run trade off implies that in an economy, if the government wants to curtail the high inflation rates, this will result in increase in unemployment. An if the government wants to increase the level of employment/decrease unemployment, this will result in an increase in the level of inflation.

This inverse relationship or trade off only exists in the short run and not in the long run. In the long run, the Phillips curve is a vertical line parallel to the y axis (inflation axis) as shown below, highlighting that in the long run, the level of unemployment is more or less fixed on the natural rate of unemployment (NRU) and is not affected by the rate of inflation.

Rahul Sunny answered 1 year ago
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