Question

Why is there an inverse relationship between inflation and unemployment?

Answer 1

The Phillips curve shows the inverse relationship between inflation and unemployment: as unemployment decreases, inflation increases.

Key Points
The relationship between inflation rates and unemployment rates is inverse.
Graphically, this means the short-run Phillips curve is L-shaped.A.W. Phillips published his observations about the inverse correlation between wage changes and unemployment in Great Britain in 1958. This relationship was found to hold true for other industrial countries, as well.From 1861 until the late 1960’s, the Phillips curve predicted rates of inflation and rates of unemployment. However, from the 1970’s and 1980’s onward, rates of inflation and unemployment differed from the Phillips curve’s prediction. The relationship between the two variables became unstable.