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In: Business and Management

Submitted By lwilliams723
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Abstract

In the following report I will be explaining the relationship between Unemployment and Inflation and to see if the Phillips curve relationship is correct. In doing so I will study the causes and effects of inflation and unemployment along with inflation and unemployment figures from the last few years.

Inflation is usually defined as a sustained increase in the general price level. We measure it as the annual percentage increase in prices. There are generally two types of inflation- Cost push and Demand pull. Demand pull Inflation occurs when there is to much spending in the economy. When consumers wish to spend money on goods and services increases faster than the supply of goods and services, or when demand exceeds supply, then prices are pulled upwards.
The increase in demand causes it to shift outwards but because supply cannot keep up with demand prices go up as well. This is shown in the diagram below:
For this type of inflation to occur people in general need to have a lot of money if there demand for general spending is high. Therefore this type of inflation generally occurs when there is a low unemployment rate for the majority of people must have some sort of income.
Cost push inflation happens when firms costs go up. To maintain their profit margins, firms then need to put their prices up. In other words cost increases have pushed inflation up. Cost-push inflation may happen for various reasons.
Wage increases - wages are a major proportion of costs for many firms and so if wages are increasing, this may well cause cost-push inflation.
Government - if the government changes taxes, this may push up firms costs. Changes in interest rates can also affect firms costs if they have borrowed significant amounts.
The effect of cost increases is to shift the aggregate supply to the left. As we can see from the diagram below, this pushes up…...

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