The Inflation-Unemployment Trade-Off
For much of the past century, economists and business people believed that there was a trade-off between inflation and unemployment. Many still do. Here’s the theory, which has often (but not always) been borne out in the real world.
An economy enjoying high demand and high employment experiences inflationary pressure—that is, upward pressure on prices. That’s because when demand for goods and services is high, consumers bid up the prices of goods and services. Sellers, of course, are happy to accommodate them. This is called demand-pull inflation, because buyers’ increasing demand pulls up prices.
There’s another type of inflation, too. When the unemployment rate is low (say, around the full-employment ...