Economics, 3rd Edition

Principle 10: Society Faces a Short-run Trade-off  

Between Inflation and Unemployment

When the government increases the amount of money in the economy, one result is inflation. Another 

result, at least in the short run, is a lower level of unemployment. The curve that illustrates this short-run 

trade-off between inflation and unemployment is called the 

Phillips curve

, after the economist who first 

examined this relationship while working at the London School of Economics.

The Phillips curve remains a controversial topic among economists, but most economists today accept 

the idea that society faces a short-run trade-off between inflation and unemployment. This simply means 

that, over a period of a year or two, many economic policies push inflation and unemployment in opposite 

directions. Policymakers face this trade-off regardless of whether inflation and unemployment both start 

out at high levels at low levels or somewhere in-between.

The trade-off between inflation and unemployment is only temporary, but it can last for several years. 

The Phillips curve is, therefore, crucial for understanding many developments in the economy. In particular, 

it is important for understanding the 

business cycle

 – the irregular and largely unpredictable fluctuations in 

economic activity, as measured by the number of people employed or the production of goods and services.

business cycle

 fluctuations in economic activity such as employment and production

---