Does lower unemployment always mean higher inflation? In the short run, often yes.
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The points to remember
- The short-run Phillips curve shows an inverse relationship: lower unemployment, higher inflation.
- A change in AD moves the economy along the curve.
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The trade-off lasts only until people expect the higher inflation.
Why the trade-off does not last
Inflation is 2%
Workers expect 2% and agree wages on that basis.
AD rises
Prices rise 4%; firms hire more. Unemployment falls to 2%.
Workers notice
Their real wages have fallen, so they ask for 4% more.
Costs rise
Firms hire fewer again. Unemployment returns to 4%, with 4% inflation.
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Remember it as: Short run: a trade-off. Long run: a vertical line at the natural rate.
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Paper 3 shows the data as a scatter. Read the pattern, then draw the long-run curve.
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What the real world shows
1960s: the trade-off
In many rich countries, lower unemployment came with higher inflation.
1970s: stagflation
Oil prices quadrupled: in the US in 1975, unemployment and inflation were both about 9%.
2019: a flat curve
US unemployment fell to 3.5% while inflation stayed near 2%.
The points to remember
- To outline the relationship, write: "When unemployment is high, inflation is low: an inverse relationship."
- The LRPC is a vertical line at the natural rate, labelled, and it rises above the SRPC.
Paper 1 asked this in November 2022, as part (b) for 15 marks.
Using real-world examples, discuss the potential trade-off between unemployment and inflation.
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See the answer broken into clear points, with guidance on how each point earns marks.
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How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |