How is unemployment related to causes of inflation?

Inflation is a sustained rise in general price levels. There are several causes for prices to rise. When production costs, such as wages and raw material prices increase- cost-push inflation occurs. Inflation due to a rise in aggregate demand, or overdemand compared to supply in the long run, is known as demand-pull inflation. This could also be caused by economic growth leads to inflationary expectations. Unemployment refers to people able and willing to work, but unable to find a job. Increased demand causes prices to rise. This is an incentive for producers to increase their output. therefore demand for labour increases. This lowers cyclical unemployment in the long run. In the short run, there is an over demand for labour. This causes wage rates to rise. This is an incentive for people to find employment since the opportunity cost of leisure increases. Cost-push inflation occurs as wages are a large contributor to production costs. However, when unemployment increases (E.g.: 2007-9 recession), a higher percentage of the population has less disposable income. Therefore firms tend to have fewer sales and the government generates less tax revenue. This can be linked to lower consumer spending and investment. In the long run, this will lower demand and thereby lower demand-pull inflation. This creates deflationary pressure. In conclusion, decreases in inflation causes higher inflation whilst rises in unemployment cause lower inflation

MB
Answered by Mark B. Economics tutor

8113 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Amazon currently sells 100 000 copies per year of an e-book at $14.99. The company estimates that customers would buy 174 000 copies of the same e-book at a price of $9.99. What is the effect on Price elasticity of Demand and Total


A product with perfectly elastic supply has sales of 100 units per week at a price of £2 per unit. Price elasticity of demand is(-)1 .5 over the relevant range. The government imposes a tax 20%. What will be the government’s weekly tax revenue?


Describe how a competitive market would react to excess supply.


Evaluate policies the government can use to increase the rate of economic growth.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning