Explain the significance to fiscal policy of the philips curve, referencing the interrelation of its components.
The Philips curve charts unemployment against the change in rate of inflation. There is an inverse relationship between the two, therefore when unemployment rises, the change in rate of inflation falls. Considering the two government macroeconomic objectives of healthy inflation (2%) and low unemployment, there is a trade off when it comes to monetary policy between these two objectives. An increased interest rate may reduce unemployment, but this will be at the cost of increases in the rate of inflation. Implementing this policy will be dependent on the inflation rate and unemployment rates at the time.
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