Question

Why is the hypothesized trade-off between unemployment and inflation important for policy makers?

Answer 1

Phillips curve denotes the trade off between unemployment and inflation.it suggested that it can be focused either on low unemployment or low inflation both not both.

If there is an increase in aggregate demand, causes during demand-pull inflation, there will be an upward movement along the Phillips curve.

Suppose If an economy experienced inflation, then the fedaral Bank could raise interest rates. Higher interest rates will reduce consumer spending and investment leading to lower aggregate demand. This fall in aggregate demand will lead to lower inflationiand if there is a decline in Real GDP, firms will employ fewer workers leading to a rise in unemployment.

Unemployment and inflation makes people unhappy where unemployment makes more miser than inflation.so for policy makers, it was very important to bring balance between them so any difference between them it will cause more choas.