Unit 2 & 4: Trade off, Unemployment & Inflation

Question “Discuss the view that the Phillips Curve is irrelevant in explaining relationships between unemployment and inflation in the UK”

If you take the 1950s and 60s you could argue there was a trade off between unemployment and inflation.

As AD increased, it caused higher output, this lead to inflation as the economy came close to full employment. However, as output increased unemployment (demand deficient unemployment) fell.

This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.


However, this view is criticised by the Monetarist view, which argues increased AD only causes inflation and no increase in Real GDP in the Long term.

Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:

Another Criticism of the Phillips curve is that in the UK, we have witnessed falling unemployment and low inflation. During the 1990s and early 2000s supply side improvements enables lower unemployment and lower inflation. This suggests that it is possible to reduce unemployment without causing inflation.


However, you could argue there is still a potential trade off except the phillips curve has shifted to the left, because there is now a better trade off.

Also the fact that both have fallen doesn’t mean we can’t go back to the 1950s and 1960s.

It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before. However, if you allow AD to increase too much there will be a trade off between inflation and unemployment