Question

Describe an inverse relationship between inflation and unemployment.

Short answer

Both unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a reduction in the unemployment rate.

Step-by-step solution

Step :1 Introduction  

In light of the stagflation that the Indian economy has been experiencing recently, the inverse link between inflation and unemployment is generally considered as validation of the theory that inflation helps the economy run at its maximum capacity."

Step :2 Explanation 

Unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a decrease in the unemployment rate. As a result, the inflation rate and the unemployment rate should be inversely related. The Philligs curve will shift outward if consumers expect efforts to exploit this Philigs curve trade off to enhance inflation.