10.2.5—Inflation and unemployment

A demand expansion may reduce cyclical unemployment while increasing inflation when spare capacity narrows. Supply shocks can raise inflation and unemployment together, producing stagflation.

Expectations, labour-market structure and the time horizon matter. A long-run trade-off is not guaranteed: once expected inflation adjusts, unemployment may return toward its natural rate.

A stimulus during a recession can bring idle workers back without much initial price pressure; an energy shock can then raise prices while firms cut output and jobs.

The Phillips-curve idea is not a permanent menu of inflation for unemployment, and correlation does not identify the policy cause.