Cambridge International as and a level Economics Ebook

Scarcity and choice, equilibrium and eff iciency: 
Choice 
and eff iciency are important concepts for a government 
when it is deciding its macroeconomic priorities and the 
policy measures it employs. Policy objectives may conflict 
in the short run but a government will seek to use policy 
measures that work as eff iciently as possible and that 
avoid adverse side eff ects on other aims.
KEY CONCEPT LINK
TOP TIP
To explain or evaluate the relationship between 
unemployment and inflation, it is useful to compare the 
views suggested by the traditional and the expectations-
augmented Phillips curves.
SELF-ASSESSMENT TASK 
10.2
Study
 Table 10.1 
and then answer the questions that 
follow.
Year
Unemployment %
Inflation %
2008
6.1
2.8
2009
9.0
–0.3
2010
9.8
1.4
2011
7.9
2.6
2012
7.8
1.6
2013
7.8
0.6
Table 10.1 
Unemployment and inflation rates in 
Sweden 2008–2013
1
Explain why changes in the unemployment rate 
and changes in the infl ation rate may move in 
opposite directions.
2
Analyse whether the data above support this 
inverse relationship.
SELF-ASSESSMENT TASK 
10.3
Unemployment and inflation
There is some evidence to suggest that the link between 
unemployment and inflation is weakening. Changes in 
unemployment in a number of countries appear to be 
having less influence on inflation. In the past, workers 
pressed for wage rises when unemployment fell, which 
pushed up the price level, and when unemployment rose 
they reduced their wage demands. For example, when 
the US unemployment rate increased from 6.3% to 10.8% 
from 1980 to 1982, the inflation rate fell from 12% to 4.5%. 
In contrast, a steeper rise in unemployment between 
2007 and 2009 saw inflation fall from only 2.4% to 1.7%.
A new version of the Phillips curve may have developed, 
with inflation remaining stable as unemployment 
fluctuates. This may be because central banks have 
increased workers’ and firms’ belief that the inflation 
rate will remain stable and this belief has influenced 
their behaviour. Such a change in behaviour may also 
help economies avoid deflation during a recession. 
Expecting prices not to fall may mean that workers 
are reluctant to accept wage cuts and because of 
anticipating stable wage demands, firms may be 
reluctant to cut prices.
Read the feature below and then answer the questions that follow.