3.3.7—Inflation versus unemployment

Inflation and unemployment may trade off in the short run, but expectations and supply shocks can alter the relationship.

Demand stimulus may lower unemployment and raise inflation; long-run unemployment depends on structural factors.

State time horizon and shock before claiming a trade-off.

A supply shock can raise both inflation and unemployment.

A Phillips curve is not a permanent policy menu.

Compare costs in context. Unemployment causes lost output and tax revenue, higher benefit spending, skills loss and personal or social harm; inflation reduces purchasing power unpredictably, redistributes real income and wealth, damages planning and may weaken competitiveness. Demand expansion can trade lower cyclical unemployment for higher inflation when capacity is tight, but a favourable supply shift can lower both. Priorities depend on severity, duration, affected groups, expectations and available policy—not only the two headline rates.