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

3060 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What could cause a rise in the demand for University places?


The price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo. Over the same period the quantity of tea purchased fell from 97 million kilos to 76 million kilos. Calculate the price elasticity of demand for tea.


What is expansionary monetary policy and how does it work?


What is the purpose of loose monetary policy?


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:

© 2026 by IXL Learning