Relationship Between Unemployment And Inflation

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Economics Assignment

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1/18/2015

Table of Contents:
Table of Contents: 2
Section 1: Relationship between Unemployment and Inflation 3
Unemployment: 3
Inflation: 3
Phillips curve: 4
SRPC- Short Run Phillips curve: 4
Real Life example of Unemployment in Australia 5
Section 2: Simple model of AD and AS 6
Aggregate demand and Aggregate supply: 6
What is AD or aggregate demand? 6
Consumption Expenditure: 6
Investment Demand: 7
Government Expenditure: 7
Net Exports: 7
Aggregate demand: 7
What is Aggregate Supply? 8
Macroeconomic equilibrium: 9
Output Gap in different countries: 10
The Macroeconomic Equilibrium at different scopes of AS: 13
Section 3: Monetary Policy Changes in
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Unemployment can be of four types - seasonal, frictional, structural and cyclical.
Inflation:
Inflation is the general increase in the price level of a basket of goods that are considered essential for living. Generally this basket of goods and their relative price indexes are fixed by statistical organizations and they calculate the Inflation rate of the economy at continuous intervals of time. Inflation can be of two types – cost push and demand pull inflation.

When the costs of raw materials that are used in the production of goods and services in an economy increases, it triggers a decline in aggregate supply as the producers are able to supply one less amount of goods and services with the increase in costs. This is termed as cost-push inflation in an economy. This may be due to increase in wage rate, increase in the costs of other raw materials used in production.
When there are shifts in the aggregate demand curve, where the demand by the people of the country goes up, this puts pressures on the general price level as the supply cannot cope up suddenly with the increasing aggregate demand. This results in demand pull inflation.

Phillips curve:

The curve that depicts the relationship between the unemployment rate and inflation rate in an economy is called the Phillips curve. IT was given by A.W.Phillips in 1958. In the short run there is a negative
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