Explain why there may be a conflict between unemployment and inflation

If the unemployment in the economy is demand deficient unemployment (Keynesian unemployment), the government needs to stimulate growth in the economy and increase aggregate demand as there is a lack of demand within the economy. The government can do this by shifting AD to the right, by stimulating an increase in consumption via government spending. This will increase the demand for labour from firms, as there is a greater demand for goods in the economy, requiring more labour to meet this increased demand for production. However, this shift in AD will cause the economy to 'overheat' as it approaches productive capacity, creating an increase in the price level (inflation). This shows the conflict/trade off between unemployment and inflation as inflation is created by the methods used to combat unemployment, and very often, the methods used to reduce inflation (often reducing AD) can create unemployment.

Alternative explanation, Philips Curve

JH
Answered by Jonathan H. Economics tutor

2763 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

If timber prices fall by 30%, what will be the expected % change in demand for timber in the economy if the Price Elasticity of Demand is -0.5, and explain the effect on revenue for a timber-selling firm.


If we see the MPC decrease interest rates, what effects should we see in the economy


Explain the assumptions behind perfect competition and how firms behave under this market structure.


'What are the disadvantages 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