With the help of a diagram, explain why a trade-off between price stability and low unemployment might occur. (9 marks)

The objective of price stability is to maintain a sustainable level of inflation, with the target being 2% for the UK government. A low level of unemployment can be defined as a low number of economic agents who are able, willing and are actively seeking employment. However, inevitably there are conflicts between macroeconomic objectives and it is not unprecedented that a trade off may occur between price stability and a low level of unemployment.
The expectations-augmented Phillips curve argues that attempts by the government to reduce unemployment below the natural rate by boosting aggregate demand will have little success in the long run [insert diagram]. However a temporary reduction can be achieved, as workers may suffer from money illusion as workers interpret a higher nominal wage as a higher real wage and will therefore be prepared to work more. Consequently we move form point A to B. However in the long run workers cannot be fooled into working more hours as they realise that the higher nominal wage is the same real wage and so the we have moved onto SRAC2. Therefore, we have returned to in the long run, to the original level of employment but with a higher price level, which is clearly a trade off between macroeconomic objectives.