Explain, with the help of a diagram, the relationship between unemployment and the rate of inflation.

Diagram: https://i.imgur.com/LCMuewo.jpg Unemployment occurs when someone is actively looking for a job in the labour market but cannot find one, whereas inflation is measured by a percentage in the annual percentage change in consumer prices. An inverse relationship of trade-offs exists between the two which can be illustrated using a Phillips Curve. As shown in the diagram, the rate of inflation is shown on the Y-axis whereas the rate of unemployment is shown on the X-axis. Taking point X for example, when inflation is at 3%, unemployment will be at 1%. Compared to point Y, with inflation at 1% and unemployment at 3%.This trade-off caused by the two factors can be explained by the fundamental economic problem - where there is a scarce amount of resources but infinite wants. As more human capital is acquired through jobs, labour becomes scarce, therefore, could increase the bargaining power of workers for higher wages since there is more demand for labour. As more workers are getting more income, it causes both demand-pull and cost-push inflation, where workers place additional demand on goods and services and firms having to pay a higher price for human capital causing higher production costs. As a consequence, when the unemployment rate decreases, the inflation rate should increase according to economic theory.

Answered by William C. Economics tutor

3030 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

The UK suffers from a persistent balance of trade deficit. what can the government do to rectify this and balance the trade figures?


Can the creation of a labour union actually cause a loss of employment?


Explain the main sources of monopoly power.


Explain how price and output are determined in both the short run and long run in a monopolistically competitive market (15 marks)


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy
Cookie Preferences